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AMERICAN  RAILWAYS   AS   INVESTMENTS 


In   Preparation 
THE    MECHANISM   OF   THE   STOCK   MARKET 

An  Inductive   Study 


AMERICAN  RAILWAYS 

AS   INVESTMENTS 


A     Detailed    and    Comparative    Analysis    of   All    the 
Leading  Railways,  from  the  Investor's  Point 
of  View;   With    an    Introductory 
Chapter  on 

THE    METHODS    OF    ESTIMATING    RAILWAY    VALUES 


BY 


CARL    SNYDER 


NEW  YORK 
THE  MOODY  CORPORATION 

iondon:     FRED'C     c.    mathieson     &     SONS 

16   COPTHALL    AVE.,     E.     C. 
1907 


: 


Copyright,  1907,  by 

THE  MOODY  CORPORATION 

All  Rights  Reserved 


First  Printing,    July,   1907 
Second  Printing,    October,  1907 


THE    MOODY-BARTON   PRESS,    ELIZABETH,   N.J. 


o 

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3 


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How  did  I  make  my  fortune  ? 

By  never  trying  to  buy  at  the  bottom 
and  by  always  selling  too  soon." 

—ROTHSCHILD 


lement  to    "American    Railways 


'■  .r,,...-,- 


Diagrammatic  Railway   Map  of  the   United  States,  showing  the  main  systems  and  the  routes  of  traffic.     Supplement  to    "American    Railways 

as  Investments"  by  Carl  Snyder.     Published  by    The  Moody  Corporation. 


CONTENTS 

Page. 

Alabama  Great  Southern  Railroad 67 

Ann  Arbor  Railroad  (See  Detroit,  Toledo  &  Ironton) 292 

Atchison,  Topeka  &  Sante  Fe  Railway 69 

Atlantic  Coast  Line  Railroad 83 

Baltimore  &  Ohio  Railroad 94 

Boston  &  Maine  Railroad 110 

Buffalo,  Rochester  &  Pittsburg  Railway 118 

Canadian   Northern   Railway 125 

Canadian    Pacific    Railway 128 

Central  of  Georgia  Railway 140 

Central  Railroad  of  New  Jersey 147 

Chesapeake  &  Ohio  Railway 156 

Chicago  &  Alton  Railway 167 

Chicago  &  Eastern  Illinois  Railroad 177 

Chicago  &  North  Western  Railway 180 

Chicago,  Burlington  &  Quincy  Railroad 191 

Chicago  Great  Western  Railway 199 

Chicago,  Indiana  &  Southern  Railroad 209 

Chicago,  Indianapolis  &  Louisville  Railway 210 

Chicago,  Milwaukee  &  St.  Paul  Railway 213 

Chicago,  St.  Paul,  Minneapolis  &  Omaha  Railway 226 

Cincinnati,  Hamilton  &  Dayton  Railway 232 

Cincinnati,  New  Orleans  &  Texas  Pacific  Railway 240 

Cleveland,  Cincinnati,  Chicago  &  St.  Louis  Railway 242 

Cleveland,  Lorain  &  Wheeling  Railway 250 

Colorado  &  Southern  Railway 253 

Delaware  &  Hudson  Company ' 263 

Delaware,  Lackawanna  &  Western  Railroad 273 

Denver  &  Rio  Grande  Railroad 283 

Detroit,  Toledo  &  Ironton  Railway 292 

Duluth,  South  Shore  &  Atlantic  Railway 301 

Erie    Railroad 306 

Evansville  &  Terre  Haute  Railroad 319 

(7) 


8  CONTENTS 

Page. 

Fort  Worth  &  Denver  City  (See  Colorado  &  Southern) 253 

Georgia  Southern  &  Florida  Railway 321 

Grand  Rapids  &  Indiana  Railway 322 

Grand  Trunk  Railway  of  Canada 325 

Grand  Trunk  Pacific  Railway 331 

Great    Northern   Railway 333 

Hocking  Valley   Railway 353 

Illinois  Central  Railroad 360 

Indiana,  111.  &  Iowa  (see  Chic,  Ind.  &  Southern) 209 

International  &  Great  Northern  Railroad 370 

Iowa  Central  Railway 372 

Kanawha  &  Michigan  Railway 376 

Kansas  City  Southern  Railway 378 

Lake  Erie  &  Western  Railroad 384 

Lake  Shore  &  Michigan  Southern  Railway 388 

Lehigh   Valley   Railroad 396 

Long  Island  Railroad 406 

Louisville  &  Nashville  Railroad 412 

Maine   Central    Railroad 423 

Michigan    Central    Railroad 428 

Minneapolis  &  St.  Louis  Railroad 433 

Minneapolis,  St.  Paul  &  Sault  Ste.  Marie  Railway 441 

Missouri,  Kansas  &  Texas  Railway 449 

Missouri  Pacific  System 456 

Mobile  &  Ohio  Railroad 469 

Nashville,  Chattanooga  &  St.  Louis  Railway 470 

New  York  Central  &  Hudson  River  Railroad 471 

Xew  York,  Chicago  &  St.  Louis  Railroad 481 

New  York,  New  Haven  &  Hartford  Railroad 487 

Xew  York,  Ontario  &  Western  Railroad 501 

New  York,  Susquehanna  &  Western  Railroad 508 

Norfolk  &  Western  Railway 510 

Northern  Central   Railway 519 

Northern    Pacific    Railway 524 

Pennsylvania    Railroad 542 

Pennsylvania   Company 566 

Pere   Marquette  Railroad 574 

Peoria  &  Eastern  Railway 580 

Philadelphia  &  Erie  Railroad 581 

Philadelphia,  Baltimore  &  Washington  Railroad 583 


CONTENTS  9 

t  Page. 

Pittsburgh  &  Lake  Erie  Railroad 585 

Pittsburgh,  Cincinnati,  Chicago  &  St.  Louis  Railway 589 

Reading    Company 595 

Rock   Island   System 610 

Rutland   Railroad 627 

St.  Louis  &  San  Francisco  Railroad 630 

St.  Louis  &  Southwestern  Railway 639 

Seaboard  Air  Line  Railway 646 

Southern  Pacific  System 656 

Southern    Railway 670 

Texas  &  Pacific  Railway 681 

Toledo  &  Ohio  Central  Railway 686 

Toledo,  St.  Louis  &  Western  Railroad 689 

Union  Pacific  Railroad 696 

Vandalia   Railroad 718 

Wabash   Railroad 722 

West  Jersey  &  Seashore  Railroad 736 

Western   Maryland   Railroad 738 

Western  Pacific  Railroad 742 

Wheeling  &  Lake  Erie  Railroad 748 

Wisconsin   Central  Railway 753 

Yazoo  &  Mississippi  Valley  Railroad 761 


FOREWORD 

The  aim  of  this  work  is  to  provide  the  general  investor, 
the  banker  and  the  investment  broker  with  the  means  whereby 
he  may  jndge  intelligently  and  readily,  so  far  as  the  accessible 
facts  will  permit,  of  the  value  of  the  securities  of  the  different 
railroads  passed  under  review.  The  volume  covers  the  operations 
of  nearly  200,000  miles  of  road,  or  about  90%  of  the  total  for  the 
country. 

More  especial  attention,  and  detail,  has  naturally  been  given 
to  the  more  important  lines  and  systems,  on  the  theory  that  they 
present  greater  opportunities  for  safe  investment,  greater  stabil- 
ity, wider  fluctuations  in  value  and  therefore  larger  opportuni- 
ties for  profit,  with  less  liability  to  suffer  from  the  minor  accidents 
of  trade  reverses,  manipulation  or  bad  management. 

At  the  end  of  each  analysis  or  review,  conclusions  and 
opinions  are  offered,  but  only  for  what  they  are  worth ;  that  is 
to  say,  all  the  material  facts  upon  which  these  conclusions  are 
based  have  been  given  in  full.  The  details,  the  figures,  the 
tables  are  there;  the  investor  may  therefore  judge  for  himself 
as  to  the  validity  of  the  conclusions  reached.  The  inductions 
offered  are  suggestions  and  nothing  more. 

The  aim  has  been  to  provide  the  broadest  possible  basis  of 
judgment,  to  offer  the  largest  perspective,  to  cut  out  that 
which  is  evanescent,  not  to  look  at  last  year's  results  or  this 
year's  conditions  merely,  but  to  consider  what  has  been  done 
through  a  series  of  years,  and  under  varying  conditions.  Only 
in  this  wise  is  it  possible  to  frame  any  intelligent  opinion  of 
the  future.  Tendencies  do  not  rapidly  change.  Established 
roads  do  not  suddenly  become  great  earners ;  they  do  not  as  a 
rule  radically  change  their  policies,  save  under  a  radical  change 
of  ownership. 

On  the  other  hand,  companies  do  not  default  their  bonds, 
they  do  not  pass  their  dividends,  unless  conditions  have  been 
preparing  for  such  a  result.    Given  a  reasonable  degree  of  honesty 

(ID 


12  FOREWORD 

in  the  published  reports  and  these  possibilities  may  be  more  or 
less  foreseen. 

Throughout,  especial  emphasis  has  been  given  to  the  elemen- 
tary fact  that  Operating  Ratios,  Net  Earnings,  Per  Cent  of  Surplus 
on  Stock,  and  all  their  like  are  for  the  most  part  simply  matters 
of  bookkeeping  and  often  little  more.  Profits  may  be  concealed, 
operating  expenses  may  be  heavily  charged  for  improvements,  or 
the  physical  condition  of  a  property  may  be  impaired.  It  is  the 
business  of  this  book  to  consider  all  these  questions  in  each  case, 
and  to  state  all  the  facts  that  are  known. 

Especial  attention  has  been  given  to  the  matter  of  main- 
tenance and  to  the  sums  devoted  to  improvements  from  earnings. 
To  permit  of  an  intelligent  judgment  as  to  these  matters, 
reliance  has  not  been  placed  upon  the  charges  for  one  year  or 
two  years,  but  for  a  series  of  years,  compared  each  year  with 
the  traffic  density.  The  showings  for  the  different  years  are 
then  averaged,  and  this  average  is  in  turn  compared  with  an 
exactly  similar  average  of  four,  five  or  six  other  roads  in  the 
same  territory,  with  the  same  general  character  of  traffic,  and 
therefore  with  the  same  general  needs. 

It  is  in  this  manner  that  the  nominal  surplus  profits  shown 
in  the  reports  are  judged,  and  conclusions  formed  as  to  how  far 
the  percentage  which  these  profits  show  on  the  stock  are  real 
profits  or  not. 

Questions  as  to  capitalization,  style  of  capitalization,  in- 
crease of  capitalization,  the  relation  of  capital  to  net  earnings, 
the  proportion  of  fixed  charges  to  total  net  income  have  been 
considered  in  much  more  detail  than  is  customary,  in  the  belief 
that  these  items  are  highly  significant  and  vital. 

Particular  consideration  has  been  given  to  the  Factor  of 
Safety  or  margin  of  income  over  fixed  charges.  In  the  judgment 
of  bond  values  this  factor  is  of  primary  interest.  The  small 
investor,  in  particular,  has  a  just  dread  of  receiverships  and 
reorganizations.  He  will  be  perspicaciously  shy,  therefore,  of 
securities  on  which  cessation  of  interest  payments  may  be  threat- 
ened, no  matter  how  valuable,  intrinsically,  may  be  the  property  on 
which  these  securities  are  a  lien. 

In  the  same  manner,  the  investor  in  stocks,  common  or  pre- 
ferred,   has    a    vital    interest    in    knowing   how    far    the    earning 


FOREWORD  13 

capacity    of    the    road    may    be    impaired    before    dividends    are 
endangered. 

In  each  case  the  treatment  has  been  uniform,  so  as  to  permit 
of  rapid  comparisons  and  ready  reference,  the  exposition  follow- 
ing the  appended 

General  Scheme. 

Importance  and  notable  characteristics. 

History. 

Territory  (Mileage,  etc.) 

Ownership   (Directors,  number  of  shareholders). 

Affiliations  (Community  of  Interest). 

Capitalization  (Including  Rentals,  Leases,  etc.). 

Value  of  Equities  Owned. 

Style  of  Capitalization. 

Increase  of  Capitalization  from  1900. 

Character  of  Traffic  (Passenger  Earnings,  etc.). 

Stability  of  Earnings. 

Maintenance  (amount  of  extra  work,  etc.). 

Improvements  from  Earnings. 

Surplus  Earnings. 

Dividend  Record  (and  "rights"). 

The  Balance  Sheet,  Profit  &  Loss  account. 

Investment  Value  (Price  and  Yield). 

It  will  be  seen  that  the  present  work  is  as  different  as 
possible  from  the  ordinary  manual,  which,  however  valuable  it 
may  be,  is  not  always  used  to  the  best  advantage  by  the  general  in- 
vestor, who  has  no  time  for  exhaustive  study  nor  to  acquire  the 
training  that  is  requisite  for  its  most  intelligent  use. 

The  aim  has  been  to  present  an  exposition  which  any  reader 
may  follow  with  understanding,  no  matter  if  he  has  never  seen 
a  railroad  report  or  never  purchased  a  railway  bond  or  a  share  of 
stock.  There  is  no  mystery  about  railway  management  or  bond 
or  share  values  and  if  there  be  any  mystery  about  a  company's 
securities,  or  if  its  reports  are  not  adequate  and  clear,  the  general 
investor  will  do  well  to  let  its  issues  alone. 


ACKNOWLEDGMENTS. 

A  full  expression  of  obligation  is  due  the  authors  and  pro- 
prietors of  the  following  publications,  for  their  free  use  in  the 
preparation  of  this  work: 

Moody's  Manual  of  Railroads  and  Corporation  Securities, 
published  by  The  Moody  Corporation,  New  York. 

Poor's  Manual  of  Railroads,  published  by  Poor's  RR  Manual 
Company,  New  York. 

The  Financial  Review,  published  annually  by  The  Commer- 
cial &  Financial  Chronicle. 

The  Wall  Street  Journal,  New  York. 

The  Railroad  Gazette,  New  York. 

The  Railway  Age,  Chicago. 

"Earning  Power  of  Railroads,"  Floyd  W.  Mundy,  published 
annually  by  Metropolitan  Advertising  Co. 

Mr.  Mundy 's  handy  little  manual  presents  an  original  analy- 
sis of  the  income  account  of  all  the  important  companies,  to- 
gether with  an  analysis  in  percentages  of  the  distribution  of  the 
gross  income  of  each  road  over  the  various  items  of  maintenance, 
cost  of  conducting  transportation  and  surplus.  This  very  useful 
publication  is  now  in  its  seventh  year. 

Readers  who  are  interested  to  go  further  will  find  Mr.  Thos. 
F.  Woodlock's  "Anatomy  of  a  Railroad  Report"  a  wonderfully 
clear  and  compact  exposition  of  the  subject;  it  includes  also  an 
illuminative  discussion  of  ton-mile  costs  and  the  reduction  of  rail- 
way expenditures  to  their  elementary  units. 

In  his  "Art  of  Wall  Street  Investing,"  Mr.  John  Moody  has 
dealt  broadly  and  sensibly  with  much  the  same  subject  which  is 
dealt  with  here  specifically  and  concretely ;  and  Mr.  Thomas 
Gibson  in  his  "Pitfalls  of  Speculation"  has  presented  a  sufficient 
warning  to  those  who  prefer  to  "speculate"  (that  is,  gamble) 
rather  than  invest,  showing  that  ''0^  of  marginal  accounts  result 
in  a  loss.  An  admirable  review  of  "The  Work  of  Wall  Street" 
has  been  presented  by  Mr.  Sereno  S.  Pratt,  well  known  as  the 
editor  of  the  Wall  Street  Journal.* 

Many  items  of  historical  interest  have  been  drawn  from  the 
descriptive  work,  "American  Railroads  as  Investments,"  by  S.  F. 
Van  Oss,  published  15  years  ago.  Thanks  are  also  due  to  several 
railway  friends  for  their  kindness  in  looking  through  different 
chapters  and  for  suggestions  and  criticisms  offered. 

*  A  very  complete  catalogue  of  financial  works,  including  all  of  those  here  named,  is  pub- 
lished by  The  Moody  Corporation  and  will  be  supplied  post-paid  upon  application. 

(14) 


INTRODUCTION 

The  Methods  of  Estimating  Railway  Values 

The  railways  of  the  United  States,  reckoned  together,  represent 
the  largest  single  "vested  interest"  in  the  world.  Their  nominal 
capitalization,  stocks  and  bonds,  now  amounts  to  more  than  fourteen 
thousand  millions,  or,  in  American  notation,  fourteen  "billions"  of 
dollars.  On  these  securities  over  five  hundred  millions  are  paid 
annually  in  interest  and  dividends ;  $300,000,000  in  interest, 
and  $200,000,000  in  dividends.  Capitalizing  this  at  the  prevailing 
savings  bank  rate  of  interest  (4%),  would  represent  a  cash  valua- 
tion of  twelve  and  a  half  billion  dollars.  This  is  an  average  of 
$150  per  capita,  or  $750  for  every  family  in  the  United  States. 

These  securities,  and  especially  the  railway  stocks,  it  is  well 
known,  are  subject  to  wide  fluctuations  in  value.  This  may 
amount  in  the  aggregate  to  an  enormous  sum.  Thus  from 
the  highest  point  in  1902  to  the  low  point  of  1903-4,  the  average  fall 
in  railway  shares  was  30%.  The  rise  from  the  low  point  of  1903-4 
to  the  high  point  of  1906  was  over  50%,  the  fall  in  1907  nearly  30%. 

Nor  were  these  enormous  fluctuations  confined  to  the  weaker 
class  of  stocks.  Below  is  a  list  of  a  dozen  standard  railway  stocks, 
showing  their  extreme  range  in  price  through  seven  years : 

Low 

1900 

N.  Y.  &  New  Hav.  207 

N.  Y.  Central 125 

Pennsylvania    124 

Reading    15 

Lackawanna    171 

C.  &  N.  W 150 

St.   Paul 108 

Ills.    Cent 110 

Louis.   &   Nash.  ...  68 

Atchison    18 

Union   Pac 44 

Gr.  Northern 144 

Average.  . .  .        107 


HIGH 

LOW 

HIGH 

LOW 

1902 

1903-4 

1905-6 

Mch.  '07 

255 

185 

216 

173 

168 

112 

167 

112 

170 

110 

148 

114 

78 

37 

164 

91 

297 

230 

560 

445 

271 

153 

249 

*138 

198 

133 

199 

*123 

173 

125 

184 

134 

159 

95 

157 

108 

96 

54 

110 

83 

33 

65 

195 

120 

203 

160 

348 

*126 

191 


121 


224 


147 


*Ex.  valuable  "rights." 


(15) 


16  INTRODUCTION 

It  will  be  seen  that  this  dozen  standard  securities  rose  in 
two  years  from  an  average  value  of  $107  per  share  to  $191  per  share, 
then  declined  within  a  year  to  an  average  of  $121  per  share,  then 
rose  again  in  eighteen  months  to  almost  double  this  figure,  and 
fell  in  1907  to  an  average  of  $147  per  share. 

The  peculiar  fact  about  this  enormous  change  in  values  was 
that  it  had  little  to  do  with  the  actual  earnings  or  the  conditions  of 
the  railways  themselves.  Throughout  this  entire  period  there  was 
practically  no  decrease  in  railway  earnings,  nor  in  railway  profits ; 
on  the  contrary,  each  year  of  this  period  proved  either  equal  to  the 
preceding  year,  or  showed  a  handsome  increase. 

These  fluctuations  present  very  large  possibilities  for  gain ; 
equal  danger  of  loss.  They  vitally  affect  a  very  considerable 
number  of  people.  The  rather  unsatisfactory  census  of  railway 
stockholders,  taken  by  the  Interstate  Commerce  Commission, 
showed  between  three  and  four  hundred  thousand  shareholders 
of  record  in  the  United  States.  The  actual  number  must  be  con- 
siderably higher.  Moreover,  a  large  proportion  of  railway  shares 
are  held  by  trust  companies,  banks  and  the  like,  whose  stocks  in 
turn  may  be  widely  distributed. 

It  is  a  very  well  known  fact  that  it  is  the  general  habit  of  the 
"public,"  the  outside  investor,  to  buy  at  the  top,  and  to  sell,  when 
he  does  sell,  at  the  bottom.  Obviously  this  is  reversing  the  Roth- 
schild "golden  rule." 

In  this  book  I  wish  to  provide  a  work  whereby  the  investor, 
instructed  or  not,  may  look  at  the  market  quotations  of  a  given 
stock  and,  within  broad  limits,  determine  for  himself  whether  this 
stock  is  cheap  or  dear,  whether  it  be  a  good  time  to  buy,  or  if  he 
holds  stocks,  to  sell.  It  is  evident  enough  that  this  can  be  done  only 
in  a  broad  way  and  under  reasonable  reserves.  But  what  is  certain 
is  that  securities  tend  to  vary  far  more  widely  than  anything  in 
their  earnings,  conditions,  or  prospects  would  naturally  determine. 

There  is  apparently  an  ineradicable  tendency  to  over  specula- 
tion, fostered  always  by  clever  manipulation  by  practised  hands. 
This  results  in  an  inflation  of  prices  beyond  just  values.  The  point 
is  always  reached  where  the  bubble  is  punctured ;  the  result  is  a 
violent  fall.  In  a  broad  sort  of  way,  here  as  elsewhere,  action  and 
reaction  are  equal.  The  price  of  shares  tends  to  fall  as  much  below 
their  real  worth  as  it  had  been  raised  above. 

In  other  words,  the  curve  of  stock  quotations  tends  constantly 
to  cross  and  recross  what  may  be  termed  the  Line  of  Value.     It  is 


INTRODUCTION  17 

the  object  of  this  work  to  enable  the  investor  to  estimate  the  Line 
of  Value  for  a  given  stock.  By  reference  then,  to  the  course  of 
prices  for  the  preceding  six  to  eighteen  months,  he  may  gain  some 
idea  as  to  whether  these  prices  are  high  or  low. 

It  is  only  by  this  means  that  an  investor  may  effect  his  pur- 
chases with  intelligence  and  foresight.  It  is  the  inevitable  tendency 
of  the  human  mind  to  believe  that  prevailing  conditions  will  last. 
If  prices  are  falling,  it  seems  natural  to  believe  that  they  will  keep 
on  falling,  or  at  least  "go  lower."  If  they  are  rising,  they  are 
always  to  "rise  a  little  more."  The  fortunes  of  folk  with  faith  like 
this  do  not  grow. 

Again,  there  are  countless  foolish  people  who  think  that  values 
do  not  determine  prices.  They  have  their  justification  in  the  very 
obvious  fact  that  the  prices,  of  railway  shares  especially,  go  up  and 
down  with  no  seeming  reference  to  the  actual  interest  they  yield, 
and  often  fall  heavily  in  the  face  of  every  indication  of  solid  worth. 

In  consequence  of  this  fact  many  men  believe  that  the  rise  and 
fall  of  prices  is  entirely  due  to  "Wall  Street  manipulation."  They 
think  they  have  simply  to  rely  upon  luck  or  "tips,"  forgetful  that  luck 
is  generally  on  the  side  of  the  shrewdest  player,  and  that  tips  are 
usually  distributed  that  credulous  folk  may  buy,  when  the  "insiders" 
or  the  "pools"  wish  to  sell. 

They  do  not  invest :  they  hardly  even  speculate  in  the  true  sense 
of  the  word.  They  are  simply  gamblers  and  nothing  more ;  and 
this  applies  just  as  much  to  the  solid  investor  who  makes  a  purchase 
on  some  one  else's  say-so  as  to  the  fatuous  army  which  chases 
fortune  upon  "the  Street"  with  margins. 

The  demonstration  that  in  a  broad  way  prices  do  follow  values 
is  simple  in  the  extreme.  We  have  merely  to  take,  say,  twenty 
standard  roads  and  set  forth  the  amount  of  surplus  income  over 
fixed  charges,  that  is,  the  sums  annually  available  for  dividends 
or  improvements,  as  shown  through  a  series  of  years,  and  find  what 
per  centage  these  sums  represent,  each  year,  on  the  combined  capital 
stock  of  the  roads  under  view.  This  series  of  percentages  may 
then  be  plotted  out  in  a  diagram  and  we  get  what  may  be  termed 
the  Line  of  Value.  If  now,  at  the  same  time,  we  take  the  average 
market  price  of  the  stocks  of  these  same  twenty  roads,  we  may  from 
this  series  of  averages  plot  another  curve,  which  we  may  term  the 
Line  of  Price. 

3 


18  INTRODUCTION 

It  is  inevitable  that  in  a  broad  way  these  two  lines  should  be 
parallel.  This  is  not  saying  that  the  Line  of  Price  will  follow  the 
Line  of  Value  from  month  to  month  or  even  from  year  to  year ; 
but  for  a  series  of  years  it  must.  There  will  be  intervals  of  devia- 
tion, and  it  is  precisely  these  deviations  which  enable  the  investor  to 
determine  whether  prices  are  high  or  low. 

He  cannot  look  forward  and  determine  whether  next  year's 
earnings  will  be  great  or  small,  but  he  can  be  certain  that  if  the  earn- 
ings continue  good  and  prices  are  low,  prices  will  rise.  In  other 
words,  if  the  Line  of  Value  and  the  Line  of  Price  are  wide  apart 
the  direction  of  one  or  the  other  will  inevitably  change. 

The  construction  of  such  a  chart  would  have  shown  that  1902 
was  a  time  for  wise  folk  to  sell  out  and  give  their  money  to  the 
loan  brokers  to  lend  to  foolish  people  at  high  rates  of  interest. 
When  prices  had  fallen  30%  in  1903-4  and  the  rates  for  money  had 
likewise  fallen  30  to  40%  it  was  a  time  to  buy.  A  stock  like  St. 
Paul,  comfortably  earning  seven  per  cent,  and  putting  the  proceeds 
of  flush  years  by  in  improvements,  is  easily  worth  $140  to  $170 
according  to  the  prevailing  rates  of  interest.  If  the  price  is  run 
up  to  $200  per  share  and  at  the  same  time  money  commands  five  to 
six  per  cent.,  it  is  obviously  an  inflated  price  and  no  one  but  gamblers 
or  imbeciles  will  buy  it  at  such  a  price.  When  it  has  fallen  to  below 
$140  a  share,  and  money  has  fallen  to  between  three  and  four  per 
cent,  and  the  road's  earnings  and  prospects  are  just  as  good  or  better 
than  they  were,  it  is  obviously  a  bargain  which  foresighted  folk 
will  snap  up  ;  and  that  is  what  wise  folk  did.  It  rose  again  to  $198 
per  share  in  1906.  With  money  at  five  or  six  per  cent.,  and  other 
prospects  remaining  about  the  same,  it  was  again  a  good  time  to 
sell. 

The  simple  fact  is  that  investing  is  a  business ;  but  not  one  in- 
vestor in  fifty  will  give  to  his  investments  anything  like  the  care 
and  attention  which  he  gave  to  the  particular  business  through  which 
his  surplus  funds  were  earned.  Instead  of  studying  values  for  him- 
self he  will  seek  advice  and  "tips." 

If  the  investor  is  able  to  secure  the  wholly  disinterested  advice 
of  some  competent  investment  banker  or  broker,  he  may  fare  very 
well.  For  those  who  have  no  such  connections,  and  for  investors 
in  general,  this  book  has  been  planned.  It  does  not  follow  the  dry- 
as-dust  path  of  the  average  railway  report,  nor  the  average  railway 
analysis,  but  endeavors  greatly  to  simplify  the  subject,  and  to  strike 
out  somewhat  new  and  original  lines. 


INTRODUCTION  19 

Elementary. 

The  problem  of  railway  valuation  is  comparatively  simple,  andv 
beyond  the  reach  of  but  few.  A  railway  is  primarily  a  carrier,  a 
carter,  a  drayman.  Obviously  then,  in  considering  an  investment, 
we  shall  ask,  What  sort  of  a  road  has  it?  What  sort  of  vans  and 
what  sort  of  horses?  What  sort  of  trade?  A  teamster  doing  busi- 
ness on  a  fine  level  macademized  road,  with  big,  heavy  vans,  and 
heavy  draft  horses,  can  work  at  a  profit,  and  underbid  a  carrier 
with  old  vans  and  poor  horses,  working  on  roads  of  heavy  grade. 
So,  for  example,  a  railroad,  other  things  being  equal,  with  a  water 
grade  like  the  New  York  Central,  has  a  tremendous  advantage  over 
an  up  and  down  grade  like  that  of  the  Erie.  The  Illinois  Central 
can  do  business  much  more  cheaply  than  the  Missouri  Pacific.  A 
road  with  a  magnificent  equipment  like  the  Lake  Shore  can  under- 
cut a  poorly  equipped  road  like  the  Nickel  Plate. 

The  initial  facts  that  we  wish  to  know  of  a  railway  then  are, 
What  sort  of  a  road  has  it ;  what  is  its  traffic ;  does  it  get  good  rates  ? 
When  we  know  what  business  it  does,  what  its  earnings  are,  then 
we  shall  ask  how  it  is  capitalized,  what  are  the  fixed  charges  these 
earnings  have  to  bear,  what  is  there  left,  and  the  amount  of  stock 
which  has  to  share  the  surplus.  We  shall  ask  if  its  earnings  are 
stable ;  if  the  maintenance  is  adequate,  if  the  policy  of  the  road  is 
conservative,  if  its  management  is  good  or  bad.  When  we  have 
done  all  this,  then  we  shall  go  into  the  market,  ask  the  prevalent 
rate  of  money,  and  by  a  simple  rule  of  thumb,  we  shall  know,  in  a 
broad  way,  whether  the  stock  is  cheap  or  dear. 

Yield  and  Value. 

But  such  would  be  an  exhaustive  analysis,  which  few  would 
care  to  make.  And,  in  reality,  there  are,  in  the  end,  only  three  or 
four  main  facts  which  the  investor  wishes  to  know.  If  he  is  pur- 
chasing bonds  he  will  want  to  know  their  price,  their  yield,  their 
security.  The  case  is  not  radically  different  for  the  purchaser  of 
stock ;  but  here  he  will  look  more  to  earnings,  more  to  the  future  ; 
in  the  primitive  sense  of  the  word,  he  will  speculate  a  little  on  futuiv. 
dividends  and  future  values. 

The  investor  in  stocks  takes  a  larger  risk  than  the  purchaser  of 
bonds.  Therefore,  he  will  expect  a  higher  rate  of  interest,  a  higher 
return  for  his  money,  and  he  will  make  his  purchases  not  merely 
with  an  eye  to  dividends,  but  to  increment  in  the  value  of  his  hold- 
ings as  well.    It  follows,  therefore,  that  the  purchaser  of  stocks  will 


20  INTRODUCTION 

wish  to  know  more  about  the  condition  of  the  road,  its  management, 
its  prospects.  He  will  consider  the  price  of  the  stock,  the  immediate 
return  on  his  money,  and  the  chances  for  enhanced  value. 

We  may  briefly  pass  in  review  the  more  important  items  which 
he  must  consider. 

The  Value  of  a  Road. 

Obviously,  the  first  question  that  an  intending  purchaser  of 
railway  securities  would  like  to  have  answered  is  the  real  or  approx- 
imate valuation  of  the  property.  If,  for  example,  a  man  wishes  to 
buy  an  interest  in  a  grocery  store  or  a  wayside  inn,  he  reckons  up 
the  value  of  the  land,  buildings,  its  past  earnings,  and  the  possible 
appraisal  of  the  good  will  of  the  business. 

With  a  railway  it  is  more  difficult.  One  may  frequently  read  in 
the  financial  journals  or  in  the  literature  sent  out  from  investment 
houses  that  such  and  such  a  road,  as  for  example,  the  Mexican  Cen- 
tral or  Canadian  Pacific  is  "very  cheap,"  because  it  is  "selling" 
for  only  so  much  per  mile.  For  the  most  part,  these  reckonings  have 
only  mediocre  value ;  frequently  they  are  utterly  misleading. 

It  is  customary  to  take  merely  the  nominal  capitalization  of  a 
road,  to  reckon  its  bonds  at  par,  the  stock  at  its  market  value,  and 
then  to  divide  the  sum  so  obtained  by  the  "  number  of  miles  oper- 
ated." It  is  rarely  that  the  underlying  bonds,  guarantees  and  ren- 
tal contracts  are  considered.  This  may  lead  to  perfectly  fantastic 
results.  For  example,  the  nominal  bonded  indebtedness  of  the 
Lackawanna  is  only  $3,000,000,  and  this,  with  its  $26,000,000  of 
stock,  gives  a  nominal  capitalization  of  only  $29,000,000.  This,  on 
its  770  miles  of  road  operated  gives  a  very  low  capitalization  per 
mile.  Upwards  of  $90,000,000  of  underlying  bonds,  etc.,  to  say 
nothing  of  the  capital  stock  of  leased  portions  of  the  system,  for 
which  the  Lackawanna  pays  $5,000,000  per  year  rentals,  are  entirely 
ignored. 

Obviously,  if  in  the  comparison  of  the  mileage  capitalization  or 
mileage  selling  value  of  different  roads,  one  has  a  large  accumula- 
tion of  underlying  bonds,  which  are  left  out  of  the  reckoning,  while 
another  owns  outright  every  mile  of  its  track,  the  comparison  be- 
comes utterly  worthless. 

The  subject  of  capitalization,  and  more  radically  still  of  over 
capitalization,  is  indeed  one  of  the  most  baffling  questions  of  railway 
economics. 

Let  us  take  the  fore  part  of  the  problem  and  ask,  for  example, 


INTRODUCTION  21 

What  is  the  mileage  capitalization  of  the  New  York  Central  ?    For 
1906  it  reported : 

Stock $178,000,000 

Bonds $230,000,000 

Total $408,000,000 

But  in  the  bonded  indebtedness  is  included  110  millions  of  col- 
lateral bonds,  issued  in  exchange  for  stock  of  the  Lake  Shore  and 
the  Michigan  Central  roads.  There  were  Sl/2  millions  of  debentures 
employed  in  a  similar  purpose.  Excluding  these,  the  funded  debt 
becomes  only  $115,000,000.  The  road  actually  owned  by  the  New 
York  Central  is  only  807  miles,  so  that,  excluding  its  Lake  Shore 
and  Michigan  Central  purchases,  the  capitalization  amounted  to 
$370,000  per  mile. 

Turning  to  the  balance  sheet,  however,  we  find  an  entry  of 
"sundry  stocks  and  bonds"  whose  cost  valuation  was  $143,000,000. 
Deducting  the  $110,000,000  considered  above,  this  leaves  $33,000,- 
000  more  to  be  taken  from  the  nominal  capitalization. 

But  New  York  Central  stock  in  the  fiscal  year  1906  sold  at 
an  average  of  40%  premium  (i.e.,  at  140),  which  would  add  $71,- 
000,000  to  its  "selling"  value,  still  leaving  a  net  of  rather  more  than 
$300,000  per  mile.  This  is  an  enormous  sum,  considering  that  the 
average  capitalization  of  all  the  railroads  in  the  country  is  only 
about  $66,000  per  mile. 

As  a  matter  of  fact,  the  New  York  Central  operates  directly 
3,700  miles  of  railroad.  By  dividing  by  this  figure  instead  of  by  808, 
the  amount  per  mile  naturally  is  cut  down  to  less  than  a  quarter. 

We  may  go  still  further.  The  New  York  Central  operates  1,300 
miles  of  double  track  and  700  miles  of  third  and  fourth  tracks,  to 
say  nothing  of  2,300  miles  of  siding,  giving  a  total  of  8,100  miles. 
But  if,  in  estimating  the  capitalization,  we  are  to  consider  mileage 
operated,  and  not  mileage  owned,  obviously  we  must  include  the 
stocks  and  bonds  of  the  leased  lines.  Turning  to  the  income  account, 
we  find  that  the  rentals  of  the  leased  lines  exceeded  the  interest  of  the 
funded  indebtedness  by  more  than  $1,000,000.  This  is  just  as  much 
of  a  "fixed  charge"  in  the  operation  of  the  road  as  its  nominal  funded 
debt.  It  is  exceedingly  difficult  to  get  at  the  valuation  of  these 
leased  lines.  Their  capital  stocks  amounted  to  more  than  $90,- 
000,000,  their  funded  debt  to  more  than  $110,000,000,  at  last  ac- 
count.    This  would  add  a  total  of  $200,000,000  to  the  actual  capi- 


22  INTRODUCTION 

talization  of  the  road.  The  operating  company  actually  pays  an 
average  of  over  4^4%  in  rentals  on  this  sum.  Roughly  then,  we 
may  state  the  net  capitalization  of  the  road  at  around  $460,000,- 
000.  This  would  represent  a  capitalization  of  over  $120,000  per 
mile  of  road  operated. 

The  current  premium  on  various  stocks  and  bonds  of  the  system 
would  probably  increase  this  amount  by  $100,000,000,  which  would 
place  the  selling  value  at  around  $140,000  per  mile. 

This  is  still  a  high  figure.  It  is  probable  that  the  8,000  miles 
of  track  and  sidings  of  the  road,  with  present  equipment,  could 
easily  be  replaced  for  $30,000  per  mile,  or  around  $250,000,000. 
Even  allowing  $100,000,000  more  for  right  of  way  and  terminals, 
the  selling  value  would  represent  a  premium  of  much  over  50%. 

It  is  clear  that  this  method  can  lead  to  no  results  of  any  prac- 
tical interest  to  the  investor.  What  he  wants  chiefly  to  know,  here, 
is  the  earning  power  of  the  capital  represented,  and  this  can  be 
reached  in  a  very  simple  way.  This  consists  in  estimating,  as  nearly 
as  possible,  the  actual  net  capitalization  of  a  road,  and  then  finding 
what  percentage  the  net  earnings  represent  upon  this  amount.  If 
the  percentage  is  low,  the  capitalization  obviously  is  high,  and 
vice  versa.  But  in  order  to  determine  this  figure,  we  must  first  of 
all  know 

What  Is  True  Capitalization. 

Enough  has  already  been  said  to  make  it  clear  that  the  nominal 
capitalization  of  a  road  often  in  no  wise  represents  its  actual  capi- 
talization. It  is  evident,  for  example,  that  a  holding  or  leasing 
company  might  be  formed  to  take  over  the  Pennsylvania  or  New 
York  Central,  and  pay  simply  a  rental.  The  rental  might  be  en- 
ormous ;  the  amount  of  underlying  stocks  and  bonds  would  corre- 
spond ;  but  the  capital  of  the  leasing  company  might  be  small.  To 
some  extent  this  is  actually  realized  with  a  number  of  roads. 

On  the  other  hand,  the  apparent  capitalization  of  the  company 
might  be  enormous  compared  with  the  traffic  earnings  of  the  mile- 
age operated,  while  a  large  part  of  this  capital  might  be  represented 
in  the  securities  of  other  roads.  Obviously,  to  reach  a  just  estimate 
of  capitalization,  the  value  or  cost  of  these  securities  should  be 
deducted  from  the  estimate  of  the  gross.  In  the  endeavor  to  reach 
something  like  a  just  estimate  of  capitalization  the  following  plan 
has  been  adopted  in  this  work : 

The  nominal  amount  of  stocks  and  bonds  of  a  given  road  has 


INTRODUCTION  23 

been  added  together ;  then  rentals  paid  have  been  capitalized  at  4% 
and  these  two  amounts  added  together.  It  is  obvious  that  in  making 
a  lease  of  another  road,  this  leasing  usually  being  the  equivalent 
of  an  absolute  guarantee,  the  leasing  lines  will  pay  something  like 
the  prevailing  savings  bank  rate  of  interest  on  the  actual  earn- 
ings of  the  line.  In  general  practice  the  present  day  leasing  basis 
is  about  4%.  We  have  then  simply  to  take  the  rentals  paid  on 
leased  lines,  multiply  this  by  25,  and  then  add  this  amount  to  the 
nominal  issue  of  stocks  and  bonds.  This  gives  an  estimate  of  what 
we  may  term  Gross  Capitalization. 

We  have  then  merely  to  turn  to  the  General  Balance  Sheet, 
and  find  the  Securities  Owned,  together  with  the  amount  at  which 
they  are  carried  on  the  books  of  the  company.  This  latter  figure 
is  generally  the  cost  price  of  the  securities.  If  the  investment  has 
been  judicious,  it  will  oftentimes  happen  that  the  actual  value  of 
the  securities  is  very  much  greater  than  the  book  value.  Wherever 
this  can  be  determined,  it  will  be  indicated.  On  the  other  hand, 
if  the  investment  be  large,  it  is  probable  that,  as  with  any  other 
business,  some  of  the  securities  will  not  have  turned  out  well.  It 
may  even  happen  that  their  book  value  may  be  excessive.  But 
in  a  general  way,  with  the  excellent  management  which  character- 
izes American  roads,  it  is  safe  to  say  that  the  book  valuation  is 
generally  below  rather  than  above  the  actual  valuation,  and  we 
shall  not  go  far  wrong  in  considering  this  book  valuation  as  a 
conservative  figure. 

In  order  to  determine  the  Net  Capitalization,  then,  we  have 
only  to  deduct  the  value  of  the  securities  from  the  estimate  of 
Gross  Capitalization  as  above  obtained.  This  will  give  us  some- 
thing like  the  actual  amount  of  capital  invested  in  the  mileage  of 
road  operated.  If  we  now  divide  the  figure  so  obtained,  by  the 
number  of  miles  operated,  we  shall  have  an  estimate  of  the  Net 
Capitalization  per  mile,  and  this  may  be  used  as  a  basis  of  com- 
parison with  that  of  any  other  road  desired. 

"Mileage  Operated." 

It  is  evident,  however,  that  the  capitalization  of  a  double  track 
road  will  be,  on  the  average,  very  much  higher  than  that  of  a 
single  track  line.  In  making  a  fair  comparison,  therefore,  we  must 
consider  the  miles  of  extra  main  track  owned  or  operated.  The 
simplest  way  is  to  reduce  this  figure  to  a  percentage  of  the  first  or 
main  track.     In  stating  the  "mileage  operated,"  in  a  railway  report, 


24  INTRODUCTION 

it  is  the  total  length  of  a  single  line  operated  which  is  given,  the 
mileage  of  extra  track  being  disregarded.  With  this  fact,  however, 
clearly  in  mind,  and  with  the  corresponding  figures  in  hand,  we 
shall  be  able,  if  we  like,  to  compare  the  capitalization  of  the  Penn- 
sylvania with  the  Texas  Central  or  any  other  line. 

But  it  is  further  evident  that  a  road  doing  a  large  business, 
earning  ten  or  twenty  thousand  dollars  per  mile,  in  gross,  will  be 
capitalized  at  a  much  higher  figure  than  a  small  road  earning  a 
thousand  dollars  or  so  per  mile.  There  is,  however,  a  simple  way 
of  reducing  the  capitalization  question  to  a  very  clear  basis.  That 
is,  comparing  the  Net  Earnings  with  the  estimated  Net  Capitaliza- 
tion, and  finding  what  percentage  the  Net  Earnings  represent,  on 
the  figure  thus  found. 

Taking  all  the  roads  of  the  United  States  together,  it  is  found 
that  the  Net  Earnings  represent  about  6%  on  the  Net  Capitalization. 
This  figure  is  not  absolute.  All  roads  do  not  follow  identically 
the  same  method  of  accounting,  and  this  introduces  some  element 
of  error.  Probably  if  the  actual  figure  could  be  reached,  or  com- 
puted, it  would  be  slightly  higher  than  this.  But  in  a  large  way 
it  may  be  said  that  the  railroads  of  the  United  States  are  capital- 
ized on  a  basis  of  6%  of  their  Net  Earnings.  This  is  a  low  figure 
and  it  means  that  the  railway  capitalization  of  the  country  is  rather 
high.  In  comparing  the  capitalization  of  a  given  road  obtained 
on  this  basis,  we  say  that  if  the  percentage  falls  below  this  figure, 
it  is  over-capitalized,  and  it  will  be  in  the  favor  of  a  road  if  this 
percentage  is  higher  than  6%. 

It  might  be  expected,  however,  that  the  older  roads  like  the 
Pennsylvania  and  the  New  York  Central  will  have  a  very  much 
higher  capitalization  than  newer  lines,  especially  in  the  West.  As 
a  matter  of  fact,  we  shall  see  that  there  is  here  no  general  rule, 
and  that  old  established  lines  like  the  Delaware  and  Lackawanna 
may  be  capitalized  on  a  much  lower  basis,  that  is  to  say,  show  a 
much  higher  percentage  of  net  earnings  on  net  capital  than  even 
some  Western  prairie  roads  whose  construction  was  cheap  and 
rates  high. 

It  is  needless  to  remark  that  there  is  a  very  distinct  relation- 
ship between  earnings  and  capitalization,  and  that  in  general,  the 
higher  the  earnings  compared  with  the  capitalization,  the  solider 
will  be  the  securities  of  the  road,  the  larger  its  dividends,  the  higher 
the  price  of  its  stock. 


INTRODUCTION  25 

Style  of  Capitalization. 

There  is,  however,  an  item  quite  as  important  to  consider  as 
the  simple  question  of  capitalization,  and  that  is  the  form  which 
this  capitalization  takes.  It  is  evident  enough  that  the  larger 
the  share  of  the  outstanding  securities  represented  by  bonds  or 
by  leased  lines  whose  securities  are  guaranteed,  the  larger  will 
be  the  proportion  which  the  Fixed  Charges  consume  from  the  Sur- 
plus Earnings.  Conversely,  the  larger  the  amount  represented  by 
stock,  the  better  the  position  of  the  road  to  meet  dull  times.  In 
considering  the  value  of  a  given  stock,  or  bond,  therefore,  we 
shall  consider  this  proportion ;  we  shall  want  to  know  what  per- 
centage of  capitalization  is  in  stock,  and  what  percentage  is  in 
bonds. 

Going  a  step  further,  we  shall  ask  what  are  the  Fixed 
Charges,  including  in  these  Fixed  Charges  rentals  and  guar- 
antees. We  shall  add  to  the  Net  Earnings  the  amount  of  "other 
income,"  that  is  to  say,  the  sums  derived  from  interest  on  se- 
curities held,  from  properties  leased,  or  rented,  and  from  various 
sources,  and  in  this  way  we  shall  obtain  an  item  known  in  the 
railway  reports  as  Total  Net  Income.  Then  we  shall  find  out 
how  much  of  this  Total  Net  Income  is  consumed  by  Fixed 
Charges.  If  it  is  less  than  half  we  may  be  sure  that  the  security 
of  the  stocks  and  bonds  is  high.  If  it  is  much  more  than  half, 
by  that  much  we  shall  understand  that  the  absolute  security  of 
the  bonds  (and  the  securities  of  the  leased  and  rented  lines),  is 
impaired.  In  other  words,  we  may  compute  the  Factor  of  Safety 
for  these  underlying  securities.  If,  for  example,  as  in  the  case  of 
the  New  York  Central,  Fixed  Charges,  rentals  included,  consume 
about  65%  of  the  Total  Net  Income,  we  shall  see  that  the  Factor 
of  Safety  for  New  York  Central  bonds  and  for  the  securities  of 
the  lines  leased  or  guaranteed  by  the  New  York  Central,  is  ap- 
parently low.  If  the  Total  Net  Income  of  the  New  York  Central 
fell  35%  in  bad  times,  with  no  decrease  of  charges,  the  ability 
of  the  road  to  meet  the  interest  on  its  bonds,  its  rentals  and  its 
guarantees,  would  be  in  danger.  The  Factor  of  Safety  of  the 
underlying  securities  of  the  New  York  Central  in  the  sense  here 
indicated,  would  therefore  be  only  35%.  As  a  matter  of  fact,  it 
is  much  higher  than  this,  in  virtue  of  its  large  equity  in  other 
roads. 

If,  on  the  other  hand,  as  in  the  case  of  the  Delaware  and 
Lackawanna,    Fixed    Charges,    rentals    and    guarantees    included, 


26  INTRODUCTION 

consume  only  30%,  or  40%  of  the  Total  Xet  Income,  it  would  be 
under  only  the  most  extraordinary  conditions  that  its  ability  to 
pay  would  be  impaired.  Its  Factor  of  Safety  is  high.  In  general 
the  investor  who  seeks  absolute  security  then,  will  avoid  roads 
with  a  low  Factor  of  Safety,  and  choose  those  where  it  is  large. 

This  same  line  of  reasoning  may  be  followed  out  as  to  the 
margin  for  dividends,  alike  for  preferred  or  for  common  stock. 
When  we  have  deducted  from  the  Total  Net  Income  the  Fixed 
Charges,  including  rentals,  we  have  the  item  known  in  the  re- 
ports as  "Surplus."  If  the  amount  remaining  over  after  Fixed 
Charges  have  been  paid  is  relatively  small,  it  is  obvious  that  the 
dividend  will  be  precarious  and  the  stock  value  correspondingly 
low.  On  the  other  hand,  if  the  surplus  is  relatively  large,  we 
shall  know  that  the  road  will  be  able  to  stand  a  considerable 
period  of  depression  and  still  be  able  to  meet  its  dividend  pay- 
ments. 

We  may  compute  the  "Margin  of  Safety"  for  stock  dividends 
in  precisely  the  same  way  as  the  Factor  of  Safety  for  bonds.  As 
a  rule  the  dividends  on  the  preferred  stocks  are  limited  to  a  fixed 
sum.  The  speculative  value  of  such  limited  dividend  stocks  is 
therefore  much  smaller  than  in  the  common,  or  in  the  cases 
where  the  preferred  may  share  equally  with  the  common.  As  a 
rule  the  preferred  stocks  are  chosen  by  investors  who  wish  a 
greater  degree  of  safety  and  are  content  with  a  smaller  yield. 

If  now,  after  Fixed  Charges  have  been  paid,  and  the  dividend 
on  the  preferred  as  well,  a  large  surplus  still  remains,  the  Margin 
of  Safetv  for  the  preferred  dividends  is  large.  This  is  very  simple 
to  compute,  and  the  investor  is  then  able  to  judge  for  himself 
as  to  the  degree  of  security  which  his  money  enjoys. 

Equities  Owned. 

It  verv  often  happens,  however,  that  the  abstracts  of  their 
condition  drawn  up  by  the  railway  companies  do  not  show  their 
actual  financial  strength.  Let  us  take  an  example.  The  New 
York  Central  issued  bonds  at  4%  and  exchanged  these  for  the 
stock  of  the  Michigan  Central  and  Lake  Shore  roads.  These 
stocks  pay  a  certain  dividend  and  go  to  offset  the  interest  pay- 
ment on  the  bonds.  In  the  actual  case  of  the  New  York  Central, 
the  dividend  returns  were  but  slightly  larger  than  the  amount  re- 
quired for  the  interest.  When,  however,  we  come  to  examine  the 
earnings  of  the  Michigan  Central,  and  the  Lake  Shore,  we  find 


INTRODUCTION  27 

that  enormous  sums  are  being"  set  aside  from  earnings  for  im- 
provements, and  that  the  earnings  are  mounting  rapidly  with  no 
corresponding  increase  in  capitalization ;  in  other  words,  a  large 
proportion  of  the  earnings  that  might  otherwise  be  available  for 
dividends  is  being  put  back  into  the  road — -"plowed  in,"  as  a 
farmer  would  say.  It  goes  without  saying  that,  given  a  judicious 
use  of  the  money  so  employed,  the  value  of  the  New  York  Cen- 
tral's holdings  in  these  two  roads  is  rapidly  increasing.  When 
the  improvements  are  completed,  these  roads  will  be  in  a  position 
to  pay  very  much  higher  dividends  than  they  now  pay.  In  other 
words,  the  New  York  Central's  "equity"  in  these  roads  is  con- 
siderable. 

All  this  must  be  considered  in  endeavoring  to  estimate  the 
value  of  a  road's  holding  of  securities.  It  is  this,  for  example, 
which  accounts  for  the  fact  that  while  the  New  York  Central 
nominally  earns  a  little  more  than  sufficient  to  pay  its  dividend, 
its  stock  has  sold  at  a  high  figure,  and  its  fixed  interest  securi- 
ties been  coveted  by  investors.  Owning  these  subsidiary  com- 
panies, as  it  does,  the  Central,  when  it  so  desired  had  merely 
to  increase  the  dividends  which  they  pay,  to  swell  its  sur- 
plus income  sufficiently  to  meet  all  charges  and  dividends  as  well. 
A  very  large  number  of  American  roads  are  huge  holding  com- 
panies, and  it  is  for  this  reason  that  the  item  of  "Equities,"  be- 
comes one  of  the  most  important  which  the  investor  has  to 
consider. 

"  Concealed  Earnings." 

There  is  the  further  item  which  may  be  considered  here,  and 
that  is  the  matter  of  earnings  carried  under  an  excess  of  expense 
account.  Nominally  the  surplus  shown  by  the  Lake  Shore  for 
1905  amounted  only  to  8.9%  on  the  common  stock.  As  a  matter  of 
fact  huge  sums  were  set  aside  from  the  earnings  for  improve- 
ments, so  that  the  actual  surplus  earned,  even  after  adequate 
maintenance  charges,  was  nearly  23%.  The  last  six  or  seven 
years  have  in  general,  been  years  of  marvellous  prosperity  for 
American  railroads,  and  it  has  become  the  usual  practice  of  the 
roads  to  set  aside  such  sums,  rather  than  pay  them  out  in  the 
form  of  dividends.  This  is  a  highly  conservative  policy  and  has 
enormously  enhanced  the  safety  of  railway  securities  as  invest- 
ments. It  likewise  means  that  the  roads  which  follow  this  policy 
are  in  an  immeasurably  better  position  to  meet  a  series  of  bad 


28  INTRODUCTION 

years  and  long  depression  such  as  followed  1893.  It  means  that 
a  road,  in  proportion  as  its  earnings  have  been  turned  back 
into  the  road  itself,  is  in  a  position  to  continue  its  present  dis- 
bursements even  though  lean  years  should  come.  Should  earn- 
ings fall  off,  improvements  could  be  suspended  and  maintenance 
charges  cut  down,  without  in  any  way  crippling  earning  capacity. 
When  Ave  come  to  examine  the  conditions  of  the  several  roads 
we  shall  look  very  carefully  to  these  questions  of  "concealed 
earnings,"  knowing  that  in  proportion  as  they  are  found,  the 
stock  of  a  road  presents  an  attractive  investment. 

Affiliations:  "  Community  of  Interest." 

There  is  yet  another  "equity,"  of  a  much  vaguer  but  none 
the  less  very  tangible  sort  which  a  road  may  have,  and  that  is 
its  friendships.  Railways  do  not  escape  from  the  rigors  of  very 
keen  and  oftentimes  bitter  competition.  Ten  or  fifteen  years  ago, 
great  battles  between  the  railways, — "rate  wars"  as  they  were 
called, — were  a  familiar  fact ;  the  results  were  often  drastic  to  the 
last  degree.  Rich  roads  were  forced  to  suspend  their  dividends. 
Even  vast  properties  like  the  Baltimore  and  Ohio  were  driven 
into  bankruptcy.  Today  these  rate  wars  are  all  but  unknown. 
This  has  come  about  through  the  introduction  of  the  well-known 
"Community  of  Interest"  idea.  Prohibited  from  "pooling,"  or 
having  agreements  to  maintain  rates,  it  was  open  to  the  railways 
to  purchase  each  others  securities,  to  interchange  directors,  and 
to  bring  competing  lines  as  far  as  possible  under  much  the 
same  ownership.  The  lead  in  this  plan  of  combination  was  taken 
by  the  Xew  York  Central  and  Pennsylvania  lines.  It  involved 
extensive  purchases  of  the  stocks  of  competing  roads,  and  as  this 
was  often  in  conflict  with  the  laws,  their  object  was  attained 
sometimes  in  extremely  roundabout  ways.  Thus,  for  example, 
the  Pennsylvania  gained  control  of  the  Baltimore  and  Ohio;  the 
Xew  York  Central  bought  the  Lake  Shore;  in  its  turn  the  Balti- 
more and  Ohio  divided  with  the  Lake  Shore  the  control  of  the 
Reading  and  other  lines;  the  Reading  acquired  a  controlling  in- 
terest in  the  Central  of  New  Jersey,  and  in  a  similiar  way  the 
Lehigh  Valley,  the  Hocking  Valley,  the  Chesapeake  and  Ohio, 
the  Norfolk  and  Western  and  other  roads  were  brought  more  or 
less  into  a  community  of  ownership.  Sometimes  the  control  of  a 
road  is  not  corporate  but  personal.  Thus,  the  stock  of  the  Dela- 
ware and   Lackawanna   is  not  owned  extensively    by  any    par- 


INTRODUCTION  29 

ticular  road,  but  its  control  lies  with  the  Vanderbilt  and  Stand- 
ard Oil  interests,  so  that  its  ownership  is  much  the  same  as  that 
of  the  New  York  Central. 

This  communal  idea  has  been  more  or  less  carried  out  over 
the  whole  country,  so  that  the  interlacing  of  interests  practically 
involves  all  the  larger  roads.  These  affiliations  are  of  very  keen 
interest  to  the  investor.  But  they  are  not  always  easy  to  trace, 
from  the  simple  fact  that  the  interlocking  of  interests  is  so  ex- 
tremely complex,  and  from  the  fact  that  the  policy  of  a  road  may 
be  dictated  in  a  very  roundabout  way. 

Thus,  for  example,  the  control  of  the  New  York  Central  is 
supposed  to  rest  absolutely  with  the  Vanderbilts.  Nevertheless, 
Standard  Oil  holdings  are  understood  to  be  heavy,  and  besides 
two  representatives  of  this  interest,  its  directorate  includes  also 
J.  Pierpont  Morgan,  and  George  F.  Baker,  president  of  the  First 
National  Bank  of  New  York  City.  This  control  holds  over  all 
the  Vanderbilt  system  and  the  Chicago  and  North  Western,  and 
to  all  intents  over  the  Delaware  and  Lackawanna  as  well. 
Mr.  Morgan  is  regarded  as  in  practical  control  of  the  Erie,  and 
the  Erie  in  turn  owns  the  New  York,  Susquehanna  and  Western. 
Also  a  director  in  the  Erie,  and  very  closely  associated  with  Mr. 
Morgan,  is  James  J.  Hill,  whose  control  of  the  Great  Northern, 
the  Northern  Pacific  and  Chicago,  Burlington  and  Quincy  is 
absolute. 

Again,  Standard  Oil  interests,  with  the  Smith  estate,  are  sup- 
posed to  control  the  Chicago,  Milwaukee  and  St.  Paul.  Repre- 
sentatives of  the  Milwaukee  and  St.  Paul  and  of  the  Chicago 
North  Western  are  to  be  found  on  the  directorate  of  the  Union 
Pacific.  The  Union  Pacific  in  its  turn  owns  the  Southern  Pacific. 
Thus  it  is  the  Vanderbilts  on  the  one  hand,  the  Standard  Oil  interests 
on  the  other,  which  stand  in  the  middle  between  the  "Hill  lines," 
and  the  "Harriman  lines."  H.  C.  Frick  is  another  director  of 
the  Union  Pacific,  prominently  interested  also  in  the  Pennsylvania, 
Reading,  in  the  Norfolk  and  Western  and  in  the  Atchison.  The 
Union  Pacific  has  large  holdings  in  the  Atchison ;  it  openly  owns  a 
large  interest  in  the  Baltimore  and  Ohio  and  in  the  Illinois  Central. 

The  banking  house  of  Kuhn,  Loeb  and  Company  is  no 
longer  represented  on  the  directorates  directly  by  its  members, 
but  it  is  known  to  be  one  of  the  most  powerful  influences  in  rail- 
road affairs  in  the  country,  and  has  latterly  come  to  be  regarded 
as  especially  influential  in  the  management  of  the  Pennsylvania. 


30  INTRODUCTION 

In  a  similar  way  it  might  be  shown  how  the  "Gould  lines," 
the  "Rock  Island"  interests,  the  Hawley  railroads,  the  Atlantic 
Coast  Line  system,  and  other  lesser  lines  are  equally  involved  in 
this  network  of  affiliations. 

The  practical  effect  of  this  community  of  interest  plan,  by 
doing  away  with  disastrous  rate  wars,  and  eliminating  to  some 
extent,  harmful  competitive  building,  has  been  to  give  railway  earn- 
ings, and  correspondingly  railway  securities,  a  degree  of  stability 
which  they  never  before  enjoyed. 

Not  all  of  the  roads,  however,  are  closely  associated  in  this 
community  of  interest.  Some  of  them  are  quite  independent.  The 
securities  of  these  independent  roads  can  hardly  be  so  solid  as  the 
others.  In  any  event,  it  will  be  interesting  in  each  case  to  note 
what  are  the  affiliations  of  the  road,  and  thus  determine  to  what 
extent  friendly  offices  would  be  extended  to  smooth  over  differences 
— should  differences  arise. 

Management. 

Finally,  there  is  a  vaguer  asset  than  any  yet  considered,  which 
is  none  the  less  a  vital  one.  This  is  management,  and  more  widely 
still,  the  history  of  management. 

It  is  one  of  the  most  curious  facts  of  railway  history,  but  one 
exemplified  fully  enough,  that  careful  and  conservative  conduct 
of  a  road  tends  in  some  sense  to  perpetuate  itself.  The  law  of  her- 
edity, so  strong  in  the  common  affairs  of  life,  obtains  in  some  sense 
among  railways  also.  It  is  not  for  nothing  that  the  Yanderbilt 
lines  have  been  under  the  control  of  a  single  family  for  more  than 
half  a  century.  It  is  not  for  nothing  that  the  Pennsylvania  has 
never  failed  to  pay  a  dividend  for  more  than  fifty  years.  It  is 
not  for  nothing  that  roads  like  the  Reading,  the  Erie,  the  Union 
Pacific,  have  been  the  footballs  of  stock- jobbing  speculators, 
and  dishonest  directors.  The  ownership  of  a  road,  the  personnel 
of  its  management,  may  change  absolutely,  yet  it  is  curious  to  note 
how  amid  all  these  changes  its  character  for  good  or  evil  will  some- 
times survive. 

This  is  why  the  history  of  a  road  is  not  without  its  importance 
to  the  intelligent  investor.  If  it  has  been  through  bankruptcy,  there 
were  ample  reasons  why ;  and  it  will  be  of  interest  to  inquire  what 
these  reasons  were,  and  to  what  extent  they  have  been  eliminated. 

Conversely,  i-f  roads  like  the  New  York  and  New  Haven,  the 
New  York  Central,  the   Pennsylvania,  the  Delaware  and  Lacka- 


INTRODUCTION  31 

wanna,  the  Chicago  &  North  Western,  have  been  able  to  survive  two 
or  three  periods  of  depression  and  bad  earnings,  it  will  not  be 
unreasonable  to  suppose  that  they  will  maintain  their  clean  records, 
and  that  they  will  be  in  better  shape  than  other  roads  to  meet  sub- 
sequent depressions,  which  come  as  inevitably  as  the  years  of  crop 
disaster. 

To  be  sure,  it  will  not  do  to  accept  the  history  of  past  per- 
formance blindly,  or  without  question.  There  have  not  been  lack- 
ing roads,  like  the  Chicago  and  Alton,  whose  securities  have  been 
regarded  as  gilt-edged,  but  which  have  suddenly  been  found  to  be 
greatly  inflated.  Nor  will  it  do  to  damn  a  road  or  avoid  its  securi- 
ties, simply  because  it  has  known  difficulties  or  had  dishonest  mana- 
gers in  the  past.  The  vital  question  is,  of  course,  whether  it  is  well 
managed  now. 

For  this  reason  it  will  be  of  interest  to  note  who  are  the  con- 
trolling spirits  of  a  road,  and  who  are  the  executives  actually  in 
charge  of  its  management.  The  latter  is  of  less  interest  to  the  inves- 
tor, for  in  a  general  way  it  may  be  said,  as  Napoleon  said  of  armies, 
"  There  are  no  poor  soldiers,  there  are  only  bad  generals."  The 
great  army  of  railway  men  in  the  United  States  has  made  a  record 
of  skillful  and  energetic  management  which  cannot  be  found  any- 
where else  in  the  world.  They  are  in  the  main  striving  to  the  utmost 
to  run  their  lines  efficiently  and  economically,  endeavoring  to  make 
the  best  possible  record  for  themselves  and  the  lines  which  they 
conduct. 

It  is  the  heads  which  we  should  look  to.  The  investor  will  ask 
himself  what  is  their  standing  in  the  financial  world ;  what  enter- 
prises they  are  engaged  in,  and  if  he  finds  that  they  have  engineered 
huge  stock-jobbing  operations,  he  will  avoid  the  securities  of  their 
roads.  He  will  know  that  if  they  suddenly  jump  the  dividends  in 
an  unusual  way,  simply  for  the  purpose  of  turning  a  quick  profit  in 
Wall  Street,  he  may  equally  expect  that  these  dividends  may  be 
suddenly  cut  when  it  suits  the  stock-jobber's  purpose. 

New  Capital  and  Old. 

There  is  another  item  which  the  investor  will  do  well  to  con- 
sider with  some  care,  and  that  is  the  recent  increase  of  capitaliza- 
tion of  a  road.  If  in  the  last  five  or  six  years  the  railway  has  been 
issuing  large  quantities  of  securities,  he  will  ask  how  the  money  so 
obtained  has  been  invested,  and  whether  it  is  yielding  an  adequate 
return.     He  will  look  at  the  corresponding  increase  of  gross  earn- 


32  INTRODUCTION 

ings,  and  if  this  increase  is  not  in  evidence  to  the  extent  it  should 
be,  he  will  turn  to  the  account  of  securities  owned,  and.  find  out 
if  the  money  has  been  put  into  the  stocks  and  bonds  of  other  lines; 
and  with  this,  the  item  of  "other  income,"  showing  the  return 
which  these  investments  yield.  If  he  finds  no  adequate  response 
to  the  new  capital,  in  either  the  one  item  or  the  other,  he  may  fairly 
conclude  that  the  capital  account  of  the  road  is  simply  being-  wa- 
tered, and  he  will  take  due  account  of  this  in  considering  value. 

The  conclusion  should  not  be  hasty.  It  may  be  that  the  road 
is  undertaking  large  improvements  which  have  not  yet  begun  to 
tell  to  their  full  strength  in  earnings.  This  is  the  case  undoubtedly 
with  the  enormous  expenditures  which  the  Pennsylvania  Railroad 
has  made  within  the  past  few  years,  in  gaining  a  terminal  station  on 
Manhattan  Island  and  pushing  its  tunnels  through  to  Long  Island. 
Nevertheless,  the  annual  accounts  should  show  the  amounts  of  these 
expenditures,  so  that  the  investor  may  know  what  deductions  should 
properly  be  made ;  and  this,  it  may  be  remarked,  is  something  that 
the  Pennsylvania  has  not  done  very  clearly.  And  here,  as  in  every 
other  instance,  the  investor  will  know  that  his  money  is  safe  in 
proportion  as  the  road  follows  a  policy  of  publicity  and  absolute 
frankness ;  that  it  is  unsafe  in  proportion  as  adequate  reports  are 
for  one  reason  or  another  withheld. 

The  Profit  of  Improvements. 

One  item  to  consider:  whether  the  improvements  or  new 
constructions  are  to  be  carried  out  when  the  general  level  of 
prices,  of  railway  materials,  of  labor  and  of  supplies,  is  high  or 
low.  It  is  said  of  the  Atchison  that  it  took  advantage  of  a  depres- 
sion, along  in  1896-7,  to  take  up  a  great  quantity  of  light  rails  and 
substitute  heavy  steel  rails  at  low  prices;  yet  such  was  the  sub- 
sequent rise  in  the  price  of  iron  that  it  was  able  to  pay  for  this 
replacement  from  the  proceeds  of  the  old. rails. 

If,  on  the  other  hand,  a  new  line  is  to  be  built,  a  heavy  recon- 
struction is  undertaken,  when  commodity  prices  have  risen  25  to 
40%,  as  they  did  in  the  ten  years  preceding  1906,  if  labor  is  very 
dear,  the  price  of  railway  supplies  high,  obviously  the  capital  so 
invested  will  yield  from  a  quarter  to  a  third  less  than  when  em- 
ployed at  the  lower  levels,  disregarding,  of  course,  the  question 
of  rates  or  the  amount  of  business.  The  point  is  simply  that  rail- 
roads built  or  improvements  made  in  flush  times  at  high  prices 
cannot  expect  to  earn  either  in  good  times  or  in  bad  times  the  same 


INTRODUCTION  33 

rate  on  the  capital  employed  as  when  the  capital  is  able  to  buy 
goods  and  labor  at  25  or  40%  less. 

Character  of  Traffic. 

There  is  an  old  adage  about  not  putting  all  one's  eggs  in  one 
basket.  If  a  road  is  dependent  for  its  prosperity  upon  the  pros- 
perity of  a  single  industry,  like  coal-mining  or  wheat-raising,  it 
goes  without  saying  that  there  will  be  a  larger  element  of  risk  in 
its  securities  than  as  though  its  traffic  were  distributed  over  a  great 
number  of  articles.  A  long  strike  in  the  anthracite  or  bituminous 
coal  regions  can  send  down  the  stocks  of  the  Lackawanna,  or  Read- 
ing, or  Chesapeake  and  Ohio,  or  Norfolk  and  Western,  and  other 
lines;  can  very  heavily  impair  the  earnings  of  these  lines  and 
threaten  their  dividends.  A  long  drouth  in  the  corn  fields  or  the 
wheat  fields  could  vitally  affect  the  prosperity  of  the  "  Grangers," 
as  in  Wall  Street  parlance,  the  Western  roads  are  known. 

It  is  for  this  reason  that  the  investor  will  look  into  the  charac- 
ter of  traffic  on  a  line,  find  out  what  portion  of  its  earnings  is  from 
passenger  service,  what  from  freight  service,  and  what  are  its  other 
resources;  he  will  inquire  whether  the  items  of  freight  are  widely 
distributed  as  to  tonnage  or  whether  as  in  the  case  of  the  Pennsyl- 
vania, and  more  distinctly  with  the  "  Coalers,"  coal  and  coke  make 
up  more  than  50%  of  the  tonnage  hauled.  Every  properly  con- 
structed railway  report  contains  this  information. 

Stability  of  Earnings. 

The  next  item  to  be  considered  is  the  degree  of  stability  which 
the  earnings  of  a  road  have  shown  through  a  series  of  years.  In  the 
present  work  this  item  will  be  carried  back  ten  years.  It  is  not, 
in  truth,  of  very  much  value  to  pursue  the  question  further  than 
this.  The  conditions  under  which  the  road  operates  may  change  so 
considerably  as  to  make  further  comparison  of  little  worth. 

Nevertheless,  it  is  to  be  said  that  the  showing  within  the  last 
ten  years  is  to  some  extent  deceptive,  and  the  investor  will  do  well 
to  be  upon  his  guard.  The  last  ten  years  have  been,  for  the  whole 
country,  years  of  almost  unexampled  prosperity,  and  in  this  pros- 
perity the  railways  have  shared  in  the  highest  degree.  The  year 
of  1896  was  the  end  of  a  long  period  of  declining  earnings  and 
declining  values.  In  the  intervening  period  almost  every  road  in 
the  country  has  shown  an  enormous  increase  in  its  gross  earnings, 
even  when  these  earnings  were  reduced  to  a  mileage  basis. 

3  I 


34  INTRODUCTION 

This  prosperity  has  been  especially  accentuated  within  the  last 
four  or  five  years.  It  is  scarcely  possible  that  earnings  can  go  on 
increasing  at  the  same  rapid  pace.  They  may  not  seriously  decrease, 
but  it  would  be  without  precedent  in  economic  history  if  the  fat 
years  should  not  be  succeeded  by  the  lean  years.  It  is  for  this 
reason  that  the  mere  fact  of  a  large  increase  in  mileage  earnings 
is  not  in  itself  absolute  evidence  of  the  stability  of  a  road.  The 
increase  is  to  be  compared  with  the  corresponding  output  of  stocks 
and  bonds,  and  with  the  degree  of  prosperity  which  the  country  has 
enjoyed.  It  may  be  that  the  earnings  have  increased  much  more 
rapidly  than  the  capitalization.  If  they  have  not  it  will  be  well  for 
the  investor  to  inquire  why. 

Maintenance. 

It  is  to  be  said,  however,  that  our  American  railroads  have  util- 
ized their  prosperity  with  splendid  foresight.  Great  earnings  have 
not  been  employed  to  maintain  huge  dividends.  No  fact  testifies 
more  to  the  conservative  character  of  American  railway  management 
than  that  dividends  have  not  tended  to  increase  with  anything  like 
the  rapidity  which  the  earnings  may  seem  to  justify.  Instead  of 
charging  improvements  to  capital  account,  as  is  the  habit  of 
British  railways,  a  tremendous  line  of  betterment  work  has  been 
carried  out  and  charged  either  directly  to  operating  expenses  or 
drawn  from  earnings  in  the  form  of  an  improvement  fund. 

The  result  of  this  policy  is  that  while  English  railways  have 
practically  reached  the  limit  of  their  capitalization,  and  they  are, 
in  some  sense,  nearly  bankrupt,  as  far  as  their  ability  to  issue  new 
capital  is  concerned,  American  railways  were  never  in  so  strong  a 
financial  position,  nor  better  able  to  meet  a  turn  of  the  tide. 

In  examining  the  maintenance  accounts  of  separate  roads,  we 
shall,  as  is  customary,  reduce  these  to  a  mileage  basis,  and  compare 
this  maintenance  with  the  so-called  "  traffic  density,"  that  is,  the 
number  of  tons  carried  one  mile  per  mile  of  road  operated.  When 
we  have  done  this,  we  shall  find,  in  general,  that  maintenance 
charges,  alike  for  Way  and  Structures  and  for  Equipment,  have 
increased  very  rapidly,  usually  much  more  rapidly  than  the  traffic 
itself.  This  is  a  good  showing.  Indeed,  so  far  as  this  policy  has 
been  pursued,  earnings  to  some  extent  have  been  concealed  in 
the  maintenance  account.  It  has  become  the  general  habit  in 
discussing  railroad  reports  to  analyse  this  item  carefully,  and 
determine  this  amount  of  concealed  earnings. 


INTRODUCTION  35 

But  this,  in  considering  the  charges  of  a  single  road,  is  apt  to 
be  misleading.  If  one  line  were  thus  to  conceal  large  earnings  each 
year,  while  its  immediate  competitors  did  not,  it  is  obvious  that  this 
might  justly  be  considered  as  part  of  the  assets  of  the  road.  But 
if  the  policy  is  equally  pursued  by  all  lines,  there  is  no  advantage 
to  any  single  road,  and  it  will  be  misleading  to  weigh  this  item  too 
heavily.  Thus  it  has  been  the  policy  of  this  book  not  to  consider 
so  much  what  an  individual  road  has  spent  over  and  above  the 
actual  needs  of  maintenance,  but  to  compare  it  with  its  competing 
lines,  and  note  whether  its  charges  have  been  relatively  high  or  low. 

In  comparing  maintenance  charges,  even  when  reduced  to  a 
mileage  basis,  it  should  always  be  taken  into  consideration  whether 
these  charges  apply  to  practically  a  single  track,  or  whether  the 
road  has  a  considerable  percentage  of  extra  main  track.  So  for 
example,  it  would  be  foolish  to  compare  the  maintenance  of  a  road 
with  a  large  amount  of  double  and  other  track,  like  the  New  York 
Central,  with  a  single  track  line,  let  us  say  like  the  New  York, 
Ontario  and  Western.  In  the  same  way  a  line  like  the  New  York 
and  New  Haven  with  a  very  large  percentage  of  passenger  earn- 
ings, and  a  comparatively  low  freight  traffic  density,  will  require 
a  relatively  larger  sum  for  maintenance  of-  way  than  a  road  whose 
earnings  are  chiefly  from  freight.  Moreover,  it  is  obvious  that 
different  roads  are  very  differently  situated  as  to  the  cost  of  vari- 
ous items  of  maintenance.  On  one  line  labor  may  be  cheaper,  on 
another  ballast,  on  a  third,  lumber  and  ties,  and  so  on. 

In  a  general  way,  too,  eastern  roads  will  have  a  higher  stan- 
dard of  maintenance,  will  be  better  kept  up,  will  have  finer  stations, 
in  the  large  centers  of  population,  their  expenditures  will  be  greater, 
than  with  roads  running  through  sparsely  populated  territory.  The 
only  basis  of  comparison,  of  course,  is  with  roads  as  closely  alike 
in  their  traffic  and  their  territory  as  possible. 

Improvements. 

Again,  all  of  the  railways  do  not  pursue  the  same  bookkeeping 
methods.  Many  lines,  as  conspicuously  the  Vanderbilt  lines,  main- 
tain a  separate  improvement  account.  What  is  considered  legitimate 
maintenance  is  charged  directly  to  the  operating  account,  while  the 
extraordinary  betterments  are  paid  from  a  separate  fund,  even 
though  this  fund  is  drawn  in  its  turn  from  the  surplus  earnings.  In 
comparing  maintenance  charges  this  fact  must  be  borne  in  mind. 


36  INTRODUCTION 

It  may  be  well  to  note,  likewise,  that  different  bookkeeping 
methods  may  make  a  great  difference  in  the  amount  of  Net  Earn- 
ings shown  and  correspondingly  in  the  items  of  Total  Net  In- 
come, and  even  in  some  cases  in  the  item  of  Surplus.  It  will 
obviously  make  a  considerable  difference  as  to  whether  the  im- 
provement fund  is  deducted  from  the  net  earnings  in  front  of  the 
Total  Net  Income,  as  in  the  case  of  the  Vanderbilt  lines  or  the 
Delaware  and  Lackawanna,  or  whether  the  amount  is  charged 
off  from  the  nominal  surplus,  as  is  the  procedure  of  the 
Pennsylvania. 

In  order  to  show  conditions  as  nearly  as  possible,  in  this  work, 
where  such  special  improvement  appropriations  are  made  they 
will  be  separately  tabulated  through  a  series  of  five  or  six  years. 

Fixed  Charges. 

Most  of  the  roads  have  other  sources  of  income  than  their 
own  traffic  earnings.  When  this  Other  Income  has  been  added 
in,  we  have  the  amount  of  Total  Net  Income.  From  this 
amount  is  deducted  the  interest  on  the  Funded  Debt  and  on  float- 
ing indebtedness,  taxes  and  sundry  special  charges.  In  most  railway 
reports  rentals  on  leased  lines  are  included  in  the  item,  but  this 
is  not  true  of  all.  In  the  present  work  it  may  be  understood  that 
rentals  are  invariably  so  included,  and  considered  as  part  of  the 
Fixed  Charges  which  the  road  must  meet. 

Surplus  Earnings. 

When  all  of  these  deductions  have  been  made,  there  remains, 
where  no  deficit  is  shown,  the  surplus  available  for  the  arbitrary 
use  of  the  directors  of  the  road.  This  Surplus  may  be,  and  to  the 
credit  of  the  managements  often  has  been  turned  back  in  part  or 
in  whole  towards  the  improvement  of  the  property.  The  tradi- 
tional policy  of  the  Pennsylvania,  for  example,  has  been,  "a  dollar 
for  improvements,  a  dollar  for  dividends."  Latterly  this  policy 
has  not  been  strictly  adhered  to ;  but  it  may  be  taken  as  a  model 
procedure,  towards  which  the  best  railroads  have  more  or  less 
striven.  Where  it  has  been  followed,  the  investor  may  be  sure 
that  his  funds  are  safe,  and  that  his  interest  and  dividends  are 
reasonably  certain. 

It  should  be  noted,  however,  that  the  bookkeeping  systems  of 
the  various  roads  differ  so  widely  that  it  is  not  always  easy  to  deter- 
mine  how    far   this   conservative   policy   has   been   pursued.      For 


INTRODUCTION  37 

example,  the  management  of  a  line  may  keep  its  maintenance 
charges  low,  with  the  intent  of  showing  a  large  surplus,  and  deduct 
from  this  a  large  appropriation  for  improvements.  On  the  other 
hand,  a  road  may  heavily  surcharge  its  maintenance  and  set  aside 
a  considerable  improvement  fund  as  well.  It  is  obvious  that  a 
management  which  pursues  this  latter  policy  may  be  trusted  in  the 
highest  degree,  and  the  securities  of  such  a  road  are  eagerly 
sought  by  careful  investors.  It  is  for  this  reason  that  these  items 
should  not  be  considered  singly,  but  in  the  aggregate,  and  that  the 
investor  should  endeavor  to  reduce  the  maintenance  and  improve- 
ment charges  to  a  uniform  basis,  in  order  that  his  comparisons 
may  be  just. 

Profit  and  Loss. 

It  is  the  general  custom  to  reserve  for  deduction  against  the 
surplus  shown  various  items  such  as  contributions  to  the  sinking 
fund,  payment  of  car  trust  and  similar  items.  Some  of  these  are 
to  all  intents  a  fixed  charge,  as  for  example,  car  trust  payments,  if 
equipment  so  obtained  is  to  be  paid  for  from  earnings  and  not 
charged  to  capital  account.  It  is,  after  all,  a  mere  matter  of  book- 
keeping, and  the  individual  reports  ought  not  to  deceive  the  investor 
by  misleading  him  as  to  the  true  surplus  earned.  It  may  readily 
deceive  him  in  case  he  does  not  see  the  individual  reports  but  relies 
simply  upon  second-hand  information.  In  the  present  work  it  has 
been  the  general  policy  to  show  the  surplus  after  such  payments, 
but  before  the  payments  to  special  improvement  funds,  etc.  Here 
and  there,  for  special  reasons,  this  has  not  been  invariable. 

When  from  the  surplus  all  charges  and  dividends  have  been 
deducted,  there  usually  remains  an  amount  sometimes  called  the 
"net  surplus,"  which  customarily  goes  to  the  credit  of  Profit  and 
Loss.  Usually  this  amount  is  relatively  small ;  sometimes,  as  in  the 
case  of  the  Great  Northern  in  1906,  it  may  be  very  considerable, 
amounting  to  $5,184,569. 

Nominally  the  Profit  and  Loss  account,  which  is  carried  on  the 
General  Balance  Sheet  as  a  liability,  is  represented  by  items  in  the 
assets,  of  corresponding  amount.  Theoretically  this  account  should 
represent  the  fund  from  which  the  road  might  draw  in  case  of 
adversity  or  need.  As  a  matter  of  fact  it  is  often  a  merely  nominal 
amount,  and  is  represented  in  the  assets  by  such  vague  entries  as 
"Cost  of  the  Road,"  etc.  It  is  for  this  reason  an  item  which  may 
have  much  meaning  or  little. 


38  INTRODUCTION 

Current  Conditions:  General  Balance  Sheet. 

The  main  items  to  be  found  in  the  balance  sheet  which  the  in- 
vestor will  wish  to  consider  are,  on  the  credit  side : 

Securities  Owned, 
Advances    to    other    lines, 
Current  assets, 
and  on  the  Debit  side : 

Current  liabilities. 

The  items  of  cost  of  the  road  and  of  cost  of  equipment  are  so 
entirely  a  mere  question  of  bookkeeping  that  they  again  may  mean 
much  or  may  mean  little.  Some  roads  like  the  Lake  Shore  or  the 
Louisville  &  Nashville,  years  ago  closed  this  account  and  all  im- 
provements have  been  charged  directly  to  earnings. 

The  item  of  advances  to  other  lines,  usually  to  leased  or  con- 
trolled lines,  should  in  general  represent  an  available  asset,  and 
may  be  so  considered.  Sometimes  they  are  entered  among  the  open 
accounts,  sometimes  separately.  Strictly  speaking,  they  are  not, 
usually,  a  quick  or  "current"  asset. 

Current  assets  may  or  may  not  include  supplies  and  materials 
on  hand.  In  any  event  these  may  not  properly  be  considered 
quick  assets  in  estimating  the  company's  working  capital. 

The  Current  Liabilities  should  include  all  open  accounts.  The 
chief  item  that  should  be  looked  to  is  the  question  of  floating  debt, 
and  this  in  general  should  not  be  large. 

The  Current  Liabilities  ought  in  general  to  be  much  less  than 
the  current  assets  and  the  difference  between  the  two  may  be  con- 
sidered in  general  as  the  company's  available  working  capital.  Where 
the  current  liabilities  exceed  the  current  assets  the  road  is  not  in  the 
condition  in  which  it  should  be,  unless  there  be  special  reasons,  which 
in  any  event  should  be  carefully  looked  into. 

Dividend  Record. 

In  the  present  work  an  endeavor  has  been  made  to  show  the 
dividend  payments  alike  on  preferred  and  common  stocks  through 
a  long  series  of  years.  It  in  no  wise  follows  that  because  a  road  has 
paid  dividends  steadily  for  the  last  ten  years  or  even  for  half  a  cen- 
tury, that  it  will  pay  them  next  year;  but  a  fine  dividend  record  in 
general  presupposes  good  management,  and  creates  a  favorable 
prejudice  as  to  the  future;  and  certainly  nothing  better  represents 
proper  capitalization  and  good  management.  It  may  often  happen 
that  dividends  have  been  paid  when  they  should  not  have  been,  but  if 


INTRODUCTION  39 

a  record  of  continuous  payments  is  accompanied  by  proof  of  proper 
maintenance  and  a  liberal  improvement,  the  securities  of  the  road 
should  possess  a  high  degree  of  solidity. 

Investment  Values. 

It  will  be  seen  from  the  foregoing  that  a  variety  of  items  must 
be  considered  in  endeavoring  to  determine  a  reasonable  price  for  the 
bonds  and  stocks  of  a  road.  It  is  not  difficult  to  see  that  the  prob- 
lem is  complex,  and  it  is  for  this  reason  that  it  requires  as  much  con- 
sideration and  good  judgment  as  the  purchase  of  any  other  kind  of 
property. 

It  is  on  this  account  that  the  estimates  given  in  this  work  can  be 
only  of  the  broadest  sort.  They  are  simply  opinions  based  upon  the 
face  value  of  the  available  evidence.  The  full  data  from  which 
these  opinions  are  formed  is  given :  it  should  be  distinctly  understood 
that  they  are  reached  by  no  secret  process  and  represent  no  special 
or  occult  knowledge,  and  in  each  case  they  should  be  carefully 
scrutinized  by  the  investor  himself. 

In  general  the  plan  has  been  to  discuss  the  showing  which  each 
road  has  made  through  a  series  of  years,  and  to  show  what  it  has 
earned  and  what  dividends  it  has  paid,  and  then  to  consider  the 
price  which  the  securities  have  brought  within  the  last  four  or  five 
years.  If  there  has  been  no  radical  change  in  the  situation  of  a 
road,  in  its  capitalization  or  in  its  earnings,  it  may  be  supposed  that 
these  prices  will  more  or  less  fluctuate  within  the  limits  shown  in 
these  four  or  five  years.  If,  on  the  other  hand,  the  earnings  of  a 
road  have  been  steadily  increasing,  and  its  prospects  are  good,  it  is 
evident  that,  other  things  being  equal,  prices  should  rule  somewhat 
higher  than  they  have. 

Naturally  an  investor  should  guard  himself  against  too  implicit 
a  trust  in  the  flush  times  of  1900-07.  Nor  does  the  fact  that 
prices  have  been  run  up  to  very  high  figures  necessarily  mean  that 
the  securities  are  an  attractive  purchase,  even  with  a  very  fine  show- 
ing as  to  the  earnings. 

"Manipulation." 

The  extraordinary  fluctuations  in  the  price  of  railroad  securities 
is,  to  the  uninitiated,  extremely  perplexing,  and  undoubtedly  pre- 
vents many  investors  from  placing  their  funds  in  railway  securities. 
In  point  of  fact  the  matter  is,  in  a  broad  way,  simple.  In  Wall 
Street  and  out,  there  is  a  large  body  of  shrewd  and  careful  dealers 
in  railway  securities,  who  study  earnings,  who  study  markets,  who 


40  INTRODUCTION 

endeavor,  so  far  as  they  may,  to  anticipate  the  future.  Their  business 
is  to  buy  when  they  think  stocks  are  low,  and  to  sell  them  when 
they  are  high. 

These  thrifty  folk  often  are  able  to  command  enormous  re- 
sources, either  from  their  own  funds,  or  those  from  banks,  trust 
companies,  insurance  companies  and  the  like.  It  is  not  impossible 
that  some  of  them  may  have  access  to  the  large  surplus  funds  of 
the  railways  themselves.  These  funds  need  not  necessarily  be  di- 
rectly used  in  this  way.  The  cash  surpluses  must  be  banked  or 
loaned  out  somewhere,  and  once  in  a  bank,  it  is  obvious  that  they  in 
turn  are  available  for  loans  to  individuals,  sometimes,  it  is  to  be 
feared;  to  the  officers  or  directors  of  the  road. 

It  is  undoubtedly  true  that  enormous  sums  are  utilized  for  the 
purpose  of  what  is  commonly  known  as  Wall  Street  "manipulation." 
Heavy  buying  of  a  stock  will  certainly  put  up  its  price,  or  main- 
tain it  when  it  is  high;  heavy  selling  will  certainly  tend  to  depress 
the  price,  and  it  is  a  part  of  the  machinery  of  Wall  Street  that  as 
much  money  may  be  made  by  selling  stocks  "short,"  as  the  phrase 
goes,  as  by  buying  them  for  a  rise. 

Selling  stock  "short,"  means  simply  selling  shares  which  the 
seller  does  not  actually  own  and  then  borrowing  shares  from  actual 
owners  who  are  willing  to  lend,  with  the  expectation  that  the  price 
will  fall,  and  that  the  securities  may  be  bought  back  for  less  than 
the  selling  price,  and  the  transaction  thus  closed. 

Manipulation  takes  the  form  usually  of  running  up  or  depress- 
ing prices  through  what  is  tantamount  to  "wash  sales,"  that  is,  the 
manipulators  practically  buy  and  sell  to  themselves.  They  cannot  do 
this  openly,  but  an  order  may  be  given  to  one  house  to  buy,  and  to 
another  to  sell,  and  in  this  way  enormous  transactions  may  be 
effected  which  in  reality  represent  little  or  no  actual  exchange  of 
property. 

This  manipulation  need  in  no  wise  harm  or  disturb  the  legiti- 
mate investor.  So  far  from  that  he  may  shrewdly  be  the  gainer 
therefrom.  It  is  unquestionable,  that  high  prices  are  habitually 
"made"  by  large  holders  of  securities,  with  the  intent  to  unload  them 
on  other  less  practiced,  or  more  optimistic  buyers.  It  is  equally  true 
that  prices  are  habitually  depressed  far  below  the  legitimate  value  of 
the  securities,  for  the  purpose  of  inducing  weak  or  frightened 
holders  to  sell  out.  But  it  is  open  almost  as  much  to  the  small  in- 
vestor to  take  advantage  of  this  situation  as  to  the  makers  of  it.  He 
should  not  expect  to  "buy  at  the  bottom,"   for   not  even   the  big 


INTRODUCTION  41 

manipulators  are  able  to  do  that.  He  need  not  expect  to  sell  at  the 
top,  for  not  even  the  manipulators  can  do  so.  It  is  customary  to 
make  high  prices  with  the  expectation  of  being  able  to  unload  at 
something  under  these  figures. 

The  Money  Market. 

There  is  in  a  general  way  a  very  good  index  as  to  whether 
securities  are  high  or  low ;  that  is  the  prevailing  rate  of  money.  This 
is  in  no  wise  absolute,  and  yet  if  the  investor  will  scan  the  fluctu- 
ations in  the  price  of  money,  through  a  series  of  years,  he  will  find 
that  in  a  broad  way  money  tends  to  be  cheap  when  securities  are 
cheap,  and  dear  when  securities  are  dear.  This  is  precisely  the  op- 
posite of  what  might  at  first  be  expected.  One  might  very  well  rea- 
son that  the  lower  the  price  of  money,  the  higher  the  price  of  securi- 
ties. In  point  of  fact  there  are  other  forces  which  tend  to  counter- 
act and  to  some  extent  to  reverse  this  primitive  law. 

The  first  is  that  securities  tend  to  fall  when  confidence  is  weak- 
ened. If  prices  are  high,  but  business  conditions  are  threatening, 
shrewd  holders  of  securities  sell  out.  They  convert  their  holdings 
into  cash.  The  result  is  a  corresponding  accumulation  of  banking 
funds  which,  if  there  be  no  disturbing  factors,  tends  to  produce  cheap 
money.  The  more  this  "liquidation"  of  holdings,  as  it  is  termed,  is 
pursued,  the  farther  the  prices  tend  to  fall,  and  the  larger  the  cash  in 
the  banks. 

On  the  other  hand,  when  business  conditions  begin  to  pick  up, 
shrewd  and  foresighted  investors  take  their  money  from  the  banks 
and  put  it  back  into  securities  which  they  will  hold  in  the  expecta- 
tion of  a  rise.  They  not  only  take  their  own  money,  but  some  of 
them  will  borrow  freely  from  the  banks,  to  purchase  securities  if  the 
latter  are  low.  They  will  deposit  the  securities  as  collateral,  and  in 
this  way  the  bank  funds  will  be  depleted.  As  the  market  rises,  the 
speculative  fever  grows ;  other  people  do  what  the  shrewd  folk  have 
done  long  before,  and  in  order  to  obtain  money  for  speculation,  they 
bid  up  the  price  of  money,  and  as  stocks  go  up,  the  rate  of  interest 
goes  up. 

It  is  peculiarly  characteristic  that  the  larger  buying  of  the  out- 
side public  always  comes  when  prices  have  reached  a  relatively  high 
level.  Naturally  the  result  is  to  force  money  still  higher,  so  that 
the  climax  of  a  stock  boom  is  usually  preceded,  or  at  least  attended 
by  a  money  "squeeze."  Then  it  is  that  the  shrewder  folk  sell  out 
their  holdings,  take  their  profits,  and  turn  the  money  over  to  the 


42  INTRODUCTION 

bankers  to  loan  out  at  high  rates.    When  the  big  holders  sell  out  the 
market  wavers  for  a  time,  and  then  tends  to  fall. 

The  Top  of  "Booms." 

It  goes  without  saying  that  all  this  is  attended  by  a  good  deal 
of  very  clever  playing  upon  the  hopes  of  human  nature.  When  those 
who  make  it  their  business  to  buy  and  sell  in  this  fashion,  and  more 
especially  the  big  manipulators,  make  up  their  minds  to  buy,  it  is 
evident  that  they  will  not  be  scattering  rose-colored  tips,  nor  giving 
out  "bull"  interviews.  The  air  will  be  filled  with  vague  rumors  of 
disaster,  frightened  folk  will  not  be  too  warmly  reassured  as  to  the 
value  of  their  holdings.  Prices  will  sag  lower  and  lower.  The 
market  will  be  very  "heavy." 

Correspondingly,  when  these  astute  folk  make  up  their  mind  it 
is  time  to  sell  out,  the  future  will  never  appear  so  bright,  rumors  of 
great  deals,  big  consolidations,  increase  of  dividends,  stock  distri- 
butions, and  the  like  will  be  scattered  broadcast.  Then  it  is  that 
"prices  are  surely  going  higher." 

All  this  is  so  simple,  so  elementary,  that  it  might  be  supposed 
that  the  game  would  have  been  played  out  long  ago,  but  that  is  what 
it  never  seems  to  do.  But  if  the  outside  public  is  caught,  if  the  in- 
vestor overreaches  himself,  and  fails  to  sell  before  the  turn  of  the 
tide,  if  he  sells  out  when  everything  looks  gloomy,  only  to  buy  back 
his  holdings  at  a  much  higher  price,  it  is  certainly  no  one's  fault  but 
his  own. 

If  he  will  but  consider  precisely  what  he  would  do  if  he  were 
in  control  of  a  property  or  of  a  business,  or  wished  to  secure  control, 
he  should  not  have  a  great  difficulty  in  following  the  course  of 
events  in  the  stock  market. 

But  he  would  be  a  more  than  foolish  man  who  would  suppose 
that  "manipulation"  may  fix  prices.  It  can,  and  it  undoubtedly  does 
influence  them  largely,  but  no  manipulation  for  a  rise  can  be 
successful  in  the  face  of  falling  earnings,  high  rates  of  interest,  fail- 
ing banks  or  poor  crops.  No  manipulation  for  a  fall  can  be  suc- 
cessful when  money  is  cheap,  when  crops  are  bountiful,  when  earn- 
ings are  high.  Manipulation  does  not  determine  values,  and  if  the 
investor  follows  business  conditions  broadly  and  intelligently,  there 
is  no  reason  why  his  investments  should  show  a  loss  a  year  after  they 
are  made.  If  he  is  buying  in  the  expectation  of  a  rise,  he  may  have 
to  wait,  often  a  considerable  time,  but  if  he  has  used  his  judgment 
soundly,  his  reward  should  come. 


INTRODUCTION  43 

Investment  and  Yield. 

It  goes  without  saying  that  what  is  true  of  buyers  who  look 
for  a  rise,  has  equal  force  for  those  who  wish  to  invest  their  funds 
simply  to  secure  a  good  rate  of  interest.  If  New  York  Central's 
stock  is  selling  above  150,  and  paying  a  6%  dividend,  it  is  obvious 
that  the  return  to  the  investor  will  be  only  4%.  If  at  the  same  time 
a  man  may  take  his  money  to  a  banker  and  have  it  loaned  out  for 
him  on  gilt  edged  securities  at  5  or  6%,  less  the  banker's  commis- 
sion, he  is  a  foolish  man  who  buys  New  York  Central  stock  at  that 
time.  This  is  always  supposing  that  he  is  investing  and  not  specu- 
lating, or  rather  gambling.  On  the  other  hand,  if  a  solid  6  or  7% 
stock  like  Pennsylvania  sells  down  to  below  112,  as  it  did  in  1903-4, 
and  there  is  every  prospect  that  its  dividend  will  be  maintained,  the 
investment  will  yield  him  above  Sy^%. 

If  at  the  same  time  money  has  fallen,  as  it  often  does,  to  3  or 
4%,  it  is  foolish  to  give  it  to  the  bankers  or  money  lenders  at  such 
a  rate.     He  will  buy  good  dividend-paying  securities  instead. 

This  is  the  A.  B.  C.  of  sound  investing. 

"Rights." 

The  return  which  investors  receive  in  the  form  of  dividends 
and  likewise  in  the  increment  in  the  value  of  their  stock  is  not  the 
only  return.  There  is  another,  which  may  equal  either  of  these  in 
value,  and  that  is  the  occurrence  of  "rights"  to  the  purchase  of 
new  stock,  below  the  market  price,  when  an  increase  of  capitalization 
is  contemplated. 

For  example,  we  may  take  the  recent  case  of  St.  Paul.  A  new 
issue  of  $25,000,000  was  authorized  and  stock  holders  of  record  were 
offered  the  opportunity  of  subscribing  to  the  new  stock  at  par,  to  the 
extent  of  about  23%  of  their  holdings.  When  these  rights  were 
offered  both  the  common  and  the  preferred  stock  of  St.  Paul  were 
selling  in  the  neighborhood  of  $200  per  share.  In  other  words,  the 
stockholders  could  subscribe  to  shares  at  $100  which  would  pre- 
sumably be  worth  in  the  neighborhood  of  $200  per  share  as  soon 
as  issued,  to  the  extent  of  23%  of  their  holdings.  The  effect  of  this 
was  to  create  "rights"  worth  from  $15  to  $18  per  share,  according  to 
the  fluctuations  of  the  stock. 

Stockholders  were  not  at  all  compelled  to  take  up  this  new 
stock  in  order  to  reap  the  benefits  of  the  opportunity.  They  might 
sell  their  rights  to  another  party  and  as  a  matter  of  fact  rights  are 
habitually  dealt  in  on  the  Stock  Exchange  in  the  same  manner  as 


44  INTRODUCTION 

stocks  and  bonds.  The  issue  of  these  rights  or  privileges  is,  with  the 
rapid  development  of  our  railways,  a  matter  of  frequent  occurrence 
which  may  happen  with  any  growing  line  such  as  the  Great  North- 
ern, the  Northwestern,  the  New  York  Central,  and  many  other 
roads.  The  value  of  the  rights  may,  over  a  series  of  years,  average 
nearly  as  much  as  the  actual  dividend,  conceivably  more. 

It  is  customary  in  speaking  of  these  privileges  to  consider  them 
in  fact  as  to  all  intents  the  equivalent  of  cash  dividends,  and  it  will  be 
of  value  therefore  to  the  investor  to  consider  precisely  their  effect. 
The  issue  of  rights  is  to  all  intents  a  stock  dividend,  but  it  does  not 
deplete  the  resources  of  a  road ;  it  merely  dilutes,  at  least  for  the 
time  being,  the  road's  capitalization.  This  fact  is  elementary  and  yet 
in  current  references  to  rights  it  is  generally  ignored.  The  assump- 
tion is  that  the  rights  are  the  exact  equivalent  of  an  ordinary  divi- 
dend, and  it  is  known  that  when  an  issue  of  new  stock  is  in  prospect 
the  tendency  of  market  quotations  is  to  rise,  and  when  the  rights 
come  off  the  effect  is  exactly  the  same  as  when  the  stock  sells  ex- 
dividend;  the  stock  is  soon  selling  at  much  the  same  figure  as  before 
the  rights  were  issued.  If  this  theory  were  sound  it  is  evident  that 
roads  might  issue  these  valuable  privileges  every  month  or  so,  and 
stockholders  make  a  thousand  per  cent,  per  year  on  their  money. 
This  is  the  reductio  ad  absurdum.  Railway  shareholders  like  the 
rest  of  mankind  cannot  have  their  cake  and  eat  it  too. 

Issue  of  "Rights"  a  Form  of  Stock  Watering. 

Let  us  take  the  specific  case  of  St.  Paul.  On  its  present  capital- 
ization, St.  Paul  is  earning  from  10  to  15%  according  as  one  esti- 
mates the  amount  spent  for  maintenance  and  the  need  of  additional 
replacements.  It  earns  very  comfortably  its  seven  per  cent,  div- 
idend on  both  classes  of  stock  and  in  fact  the  stock  sells  on  a 
rather  higher  basis  than  the  dividend  would  justify,  doubtless  in 
anticipation  of  an  eventual  increase  in  the  dividend  rate. 

The  average  price  for  the  rights  to  the  first  1906  issue  of  stock 
was  $17.  In  anticipation  of  these  rights  the  price  of  both  classes  of 
stock  was  run  up  very  considerably,  and  when  the  rights  came  off 
the  price  was  about  the  same  as  before  they  had  been  issued.  The 
effect  of  this  to  the  man  who  at  this  time  sold  his  rights  and  his 
stock  or  who  took  up  the  new  stock  and  then  sold  his  entire  holdings 
was  to  give  him  a  cash  dividend  of  $17  per  share.  It  is  obvious, 
however,  that  this  cannot  be  the  permanent  effect,  for  this  is  to  sup- 
pose that  the  road  can  continue  to  earn  from  10  to  15%  on  the  in- 


INTRODUCTION  45 

creased  capitalization  as  easily  as  upon  the  old.  This  might  be  true 
in  a  specific  instance  but  it  is  obvious  that  it  cannot  be  true  generally. 
Otherwise  there  would  be  such  a  rush  to  build  railways,  with  the 
consequent  struggle  for  business  and  the  reduction  of  rates  that  the 
earning  power  of  St.  Paul  and  of  all  other  roads  in  its  territory 
would  fall  to  the  general  level  of  the  earning  power  of  money.  If, 
for  example,  railroad  men  could  freely  borrow  at  from  four  to  five 
per  cent,  and  build  railways  that  would  yield  them  from  ten  to 
fifteen  per  cent.,  they  would  borrow  every  dollar  they  could  lay 
hands  on.  As  a  matter  of  fact  the  general  earning  power  of  rail- 
way capital  stands  at  about  the  same  level  as  any  other  business 
involving  a  corresponding  risk.  No  one  could  take  236  million 
dollars  and  build  another  St.  Paul  Railroad  in  St.  Paul's  territory 
and  earn  ten  or  fifteen  per  cent,  dividends  on  the  portion  of  capital 
set  aside  as  stock. 

The  present  selling  price  of  St.  Paul  stock  represents  the  ad- 
vantage of  a  natural  monopoly  which  every  railway  possesses  in  a 
greater  or  less  degree,  and  the  accumulative  effect  of  thirty  years  of 
shrewd  and  careful  management.  The  value  of  the  rights  was  not 
based  on  the  idea  that  the  $25,000,000  of  new  stock  would  imme- 
diately earn  a  similar  rate;  they  represented  the  value  of  the  privi- 
lege of  buying  into  a  share  of  the  St.  Paul's  present  assets.  It  fol- 
lows therefore,  that  theoretically  at  least  the  value  of  the  share- 
holders' stock  was  lessened  by  exactly  the  amount  received  in 
rights.  Why  then  should  the  price  of  the  stock  rise  exactly  as 
though  ordinary  dividends  were  in  prospect?  The  reason  undoubt- 
edly is  this :  the  St.  Paul  has  a  high  reputation  for  good  manage- 
ment ;  the  new  issue  did  not  represent  more  than  about  ten  per  cent, 
increase  in  the  total  capitalization  of  the  road ;  and  the  expectation 
undoubtedly  was  that  this  money  could  be  so  well  invested  that  the 
issue  would  not  immediately  impair  the  dividend  paying  power  of 
the  road  greatly,  and  eventually  not  at  all. 

In  actual  practice  this  theory  works  out  very  well.  For  example, 
the  rights  on  Great  Northern  stock  issues  have  been  very  consider- 
able and  yet  the  stock  steadily  increased  in  price.  This  tends  to 
obscure  the  fact  that  every  such  stock  issue  dilutes  the  value  of  the 
rest.  It  simply  represents  "taking  profits."  The  increment  in  value 
would  have  been  just  that  much  greater  had  the  stock  privilege  not 
been  created. 

What  then  will  the  shrewd  investor  do?  He  will  scrutinize  very 
carefully  the  amount  of  the  new  issue,  consider  what  percentage  of 


46  INTRODUCTION 

increase  it  represents  on  the  stock  capital  and  in  the  total  capital  of 
the  road,  the  purpose  to  which  it  is  to  be  devoted,  the  record  of  the 
road  with  previous  ventures  of  the  same  sort.  If  capital  is  in- 
creased more  rapidly  than  the  earnings  he  will  take  advantage  of  a 
time  when  the  general  level  of  stocks  is  high  and  sell  out.  If,  on 
the  other  hand,  he  concludes  that  the  new  issue  will  be  advantageous 
and  profitable,  he  will  take  advantage  of  a  general  depreciation  in 
the  value  of  stocks  to  buy  at  the  time  of  such  general  depression. 
He  may  be  sure  that  the  stock  of  roads  issuing  new  securities  will 
then  be  much  more  depressed  than  that  of  others.  If,  therefore,  his 
judgment  be  sound,  he  will  be  able  to  profit  by  the  fears  of  other 
shareholders  who  have  not  the  same  confidence  in  their  own  minds. 

How  to  Compute  the  Value  of  Rights. 

Inasmuch  as  the  method  of  computing  the  value  of  rights  is 
slightly  complicated,  an  illustration  may  be  given.  Let  us  take  the 
instance  of  St.  Paul  again,  where  the  stockholders  were  allowed  to 
subscribe  to  23%  of  their  holdings  to  new  stock  at  par.  The  com- 
mon stock  was  at  that  time  selling  a  little  below  $200  per  share.  Let 
us  take  the  round  figure,  and  the  operation  is  as  follows  : 

One  hundred  shares  at  $200  per  share  equals $20,000 

Twenty-three  shares  at  $100  equals 2,300 

Total   cost  of   123   shares $22,300 


Average  cost,  $181  per  share. 

Deducting  $181  from  the  market  quotation  leaves  $19,  the  value 
of  the  rights  on  each  share  of  St.  Paul  stock.  As  a  matter  of  fact 
the  selling  price  was  a  little  below  $200,  and  the  highest  price  of  the 
rights  fell  a  little  below  $19  per  share. 

In  other  words  the  process  is  simply  to  take  the  number  of  new 
shares  per  hundred  shares  of  the  original  holding  to  be  subscribed 
for,  and  add  the  value  of  these  new  shares  at  the  subscription  price 
to  the  cost  of  one  hundred  shares  at  the  market  price;  then  divide 
the  total  cost  of  both  old  and  new  shares  by  the  total  number  of 
shares,  and  deduct  the  average  price  from  the  market  quotation. 
This  gives  the  selling  value  of  the  rights. 

"Convertibles." 

Of  recent  years  there  has  been  a  tendency  towards  the  issue  of 
a  new  form  of  security,  that  is  the  convertible  bond — a  bond  that 
at  the  option  of  the  holder  may  be  turned  into  stock  at  a  fixed  price. 


INTRODUCTION  47 

The.  Pennsylvania,  the  Atchison,  the  Erie,  and  the  Delaware  and 
Hudson  have  been  among  the  roads  to  put  out  these  new  issues,  but 
it  is  doubtful  if  any  of  the  above  have  yielded  the  spectacular  profits 
made  from  the  convertibles  issued  by  the  Union  Pacific  in  1901. 

These  bonds,  issued  at  par,  convertible  into  common  stock  of  the 
Union  Pacific  at  par,  seemed  a  drug  on  the  market  for  a  consider- 
able time.  They  could  have  been  purchased  as  late  as  1904  as  low 
as  $90.  With  the  coming  of  another  year,  after  Union  Pacific 
Common  had  begun  to  soar  above  par,  the  bonds,  of  course,  went 
with  them.  When  the  stock  sold  above  $190  the  convertible  priv- 
ilege represented  a  profit  of  nearly  100%;  on  the  investment. 

An  attractive  feature  of  the  convertible  bond  is  that  it  presents 
a  minimum  of  risk  with  a  considerable  speculative  opportunity  of 
gain.  The  option  remains  with  the  holder  to  keep  his  bond  or  turn 
it  into  stock  according  as  he  considers  to  his  best  interest.  The 
interest  payments  come  before  any  preferred  dividends  or  for  that 
matter,  if  they  exist,  before  interest  payments  on  income  bonds. 

They  are,  of  course,  junior  securities,  in  case  of  the  fore- 
closure of  the  company,  to  first  mortgage  or  such  prior  liens ;  but  if 
the  road  be  in  good  shape,  financially,  and  if  the  fixed  charges,  in- 
cluding the  interest  on  the  issue  of  convertible  bonds,  consumes  no 
more  than  fifty  to  sixty  per  cent,  of  the  total  net  income — the  road 
being  in  supposed  good  condition,  well  maintained  and  well  managed, 
the  security  is  as  good  as  the  average  investor  would  find  elsewhere. 
With  a  reasonable  sense  of  security  comes  possibilities  of  a  steady 
increment  in  the  value  of  the  stock  of  the  road,  into  which  the  con- 
vertible bonds  may  be  turned  at  the  wish  of  its  holder.  Naturally 
the  conversion  price  is  fixed  somewhat  above  the  market  price  of 
the  stock.  The  idea  is  that  two  or  three  years  of  opportunity  should 
be  allowed  for  the  road  to  utilize  the  funds  secured  from  the  sale 
of  the  securities,  in  improvements  and  new  constructions.  When 
these  improvements  begin  to  show  in  increased  earnings,  the  stock 
should  rise  to  the  conversion  price,  and  the  holder  may  then  step  in 
and  take  advantage  of  the  rise. 

The  investor  has  the  advantages  in  the  meantime  of  a  fixed 
rate  of  interest  which  is  not  possible  for  the  ordinary  shareholder, 
and  none  of  the  hardships  which  may  be  entailed  upon  ordinary 
stockholders. 

Obviously  it  is  a  very  attractive  way  of  raising  money,  but  not 
in  all  cases  an  advantageous  one.  It  is  scarcely  so  sound  a  policy  as 
financing  improvements   or  new   constructions  purely  from   stock 


48  INTRODUCTION 

issues,  but  on  the  other  hand  it  is  better  than  the  issue  of  ordinary 
bonds  which  bear  interest  at  fixed  rates.  If  all  goes  well  the  con- 
vertibles are  turned  into  stock  eventually  and  the  proper  proportions 
of  stock  to  total  capitalization  is  maintained. 

Effect  of  "Convertibles"  on  Stock  Prices. 

The  first  effect,  of  course,  is  to  increase  the  Fixed  Charges,  and 
it  is  obvious  that  a  road  cannot  as  safely  issue  convertibles  as  it  can 
issue  stock.  Moreover,  the  issues  of  convertibles  lie  as  a  dead 
weight  on  the  stock  itself  and  to  that  extent  are  detrimental  to  the 
interests  of  the  existing  stockholders. 

If,  for  example,  the  Atchison  issues  $50,000,000  of  bonds  con- 
vertible into  common  stock,  and  the  conversion  price  be  par,  then 
when  Atchison  begins  to  climb  above  par,  and  the  conversion  takes 
place,  the  stock  will  be  loaded  with  the  extra  requirements  of  divi- 
dend disbursements.  Other  things  being  equal,  the  situation  of  the 
prior  stockholders  will  not  be  nearly  so  good  as  if  the  road  had 
issued  ordinary  4%  bonds.  In  the  latter  instance,  the  prior  stock- 
holders would  have  a  smaller  dividend  surplus  to  divide  between 
themselves,  but  if  there  is  an  increase  of  surplus  they  would  by  rea- 
son of  the  conversion  receive  only  two-thirds  of  the  benefit  derived 
from  the  issue  of  new  securities.  In  other  words,  the  issue  of  con- 
vertibles would  commonly  tend  to  depress  the  price  of  the  stock 
more  than  the  issue  of  ordinary  junior  lien  bonds,  though  the  force 
of  this  is  to  some  extent  counteracted  by  the  eventual  conversion  of 
the  latter,  and  the  lower  Fixed  Charges  than  would  be  the  case  with 
ordinary  bonds. 

Figuring  the  value  of  the  convertibles  is  comparatively  simple. 
They  are  usually  simply  a  junior  security,  a  general  lien  on  all 
sources  of  income.  All  the  investor  has  to  consider,  therefore,  is  the 
general  status  of  the  road.  That  is  determined  by  noting  the  percent- 
age of  Fixed  Charges  on  total  net  income,  and  the  margin  of  safety, 
what  is  the  average  income  of  the  road  and  what  are  the  new  securi- 
ties. This  done,  one  may  consult  the  market  quotations  and  see  how 
far  they  are  from  the  conversion  price  of  the  bonds. 

Taking  the  specific  case  of  Pennsylvania  convertibles :  The 
3^2%  issue  of  1912  represents  only  a  25%  increase  of  the  fixed 
debt  of  the  road,  and  scarcely  a  ten  per  cent,  increase  in  its  fixed 
charges,  including  all  rentals,  and  guarantees  for  which  the 
Pennsylvania  was  liable.  As  ordinary  3y2%  securities,  that  is  with  no 
special  liens,  these  bonds  would  have  been  worth,  with  savings  bank 


INTRODUCTION  49 

money  at  2>y2c/o,  par  or  very  near  it.  Savings  bank  money  tending 
to  rise  to  4%,  the  price  of  the  securities  would  naturally  fall.  The 
conversion  price  was  $70  for  the  $50  share  of  the  Pennsylvania 
stock,  or  on  the  basis  of  the  New  York  quotations  $140  for  each 
$100  of  stock.  If  these  bonds  could  be  bought  at  ninety,  the  point 
of  profitable  conversion  would  then  be  $126.  If  the  market  price 
of  Pennsylvania  went  above  this,  there  would  be  a  profit  in  the 
conversion.  As  a  matter  of  fact  the  chances  are  that  these  margins 
of  profit  will  be  very  small  and  if  there  be  any  considerable  discrep- 
ancy, the  investor  will  do  well  to  inquire  very  closely  into  the  cause. 
Supposing  a  purchase  of  the  bonds  at  $90,  the  rise  of  Pennsylvania 
stock  above  $126  would  represent  a  clear  gain  to  the  holder  of  con- 
vertibles, plus  his  regular  interest,  which  would  be  in  the  case  noted 
slightly  better  than  Zl/2%. 

The  Future  of  Prices;  The  Cycle  Theory. 

At  a  first  glance  nothing  would  seem  more  fantastic  than 
the  idea  of  looking  ahead  ten  or  twenty  years  in  the  endeavor  to 
forecast  the  general  range  of  stock  prices  through  this  period. 
Yet  it  is  certain  that  an  intelligently  speculative  mind  twenty  or 
thirty  years  ago  might  have  put  forth  a  fair  working  guess  at 
the  course  of  prices  within  this  intervening  period,  and  barring 
the  too  frequent  recurrence  of  wars,  earthquakes  and  other 
visitations  of  divine  Providence,  there  seems  no  reason  why  in 
a  broad  way  the  trend  of  prices  in  the  future  may  not  to  some 
extent  be  anticipated. 

The  general  theory  of  the  business  cycle  is  now  so  well  estab- 
lished that  the  business  man  or  investor  who  would  disregard  it 
would  be  in  much  the  same  position  as  the  farmer  who  would 
ignore  the  course  of  the  seasons  and  plant  his  corn  in  the  fall  with 
the  expectation  of  gathering  it  in  December.  That  business 
tends  to  move  in  rather  broad  and  irregular  cycles,  that  a  series 
of  years  of  tremendous  activity,  of  rising  prices,  inflated  values 
and  universal  prosperity, — the  flush  times  of  a  general  "boom", 
are  invariably  and  inevitably  followed  by  a  period  of  declining 
prices,  business  stagnation,  wide-spread  failure  and  general  de- 
pression, is  now  a  matter  of  elementary  knowledge.  That  rail- 
way shares  tend  generally  to  follow  this  general  cycle  is  not 
so  well  known  and  the  proof  of  it  is  of  some  interest. 

Since  1872  Dun's  Review  has  published  tables  showing  the 
average  price  of  60  of  the  most  active  stocks  on  the  New  York 
market,  and  the  present  writer  has  charts  showing  these  averages 

4 


50  INTRODUCTION 

back  to  the  close  of  the  Civil  War.  In  these  tables  it  is  shown 
that  in  the  35  years  from  1865  to  1900,  the  highest  average  point 
reached  by  stocks  was  in  1881  and  that  this  high  level  was  not 
again  attained  until  1901,  just  an  even  20  years  later. 

From  1870  to  1873  there  was  a  general  fall  in  stock  prices, 
culminating  in  the  famous  panic,  and  this  was  followed  by  four 
years  of  general  depression.  Actually,  stocks  touched  a  much 
lower  level  in  1877  than  in  1873.  There  was  a  precisely  similar 
fall  from  1890  to  1893,  followed  by  the  same  four  years  of  general 
depression,  stocks  reaching  a  record  low  level  for  ten  years 
towards  the  close  of  1896. 

From  1877  to  1881  and  '82  prices  rose  rapidly, — in  Dun's 
list  by  a  total  of  400%.  This  was  followed  by  a  sharp  decline 
from  '81  to  '84,  though  prices  never  again  reached  the  low  level  of 
77.  From  1897  to  1901-2  there  was  an  exactly  similar  rise  in 
prices,  in  this  instance,  however,  amounting  to  only  200%.  From 
the  top  level  of  1902  there  was  again  a  similar  decline  through 
1903-4,  though  prices  did  not  return  to  the  low  levels  of  1893-'97. 

From  the  low  level  of  1884  to  1887  prices  rose  very  nearly 
100%  and  from  that  year  showed  a  slow,  oscillating  decline  to 
1897.  The  top  level  of  1887  was  not  again  reached  for  12  years 
thereafter. 

There  was  an  exactly  similar  rise  from  the  beginning  of  1904 
through  1906  and  almost  to  1907,  followed  by  a  sharp  fall. 

The  20-year  parallel  is  so  extraordinarily  close  that  one 
might  mistakenly  suppose  that  one  had  here  an  almost  panta- 
graphic  means  of  forecasting  prices.  This  is  an  illusion.  The 
cycle  is  there,  but  it  is  an  irregular  cycle,  like  the  perturbations 
in  the  orbit  of  a  planet  acted  on  by  the  attraction  of  various 
other  planets.  Thus,  for  example,  the  60  stocks  of  Dun's  list 
showed  an  average  drop  of  50%  from  the  low  level  of  1873  to 
that  of  '77 ,  a  tremendous  fall,  though  it  is  to  be  noted  that  the 
average  fall  shown  in  the  table  of  ten  of  the  best  stocks,  in  the 
present  writer's  tables,  shows  no  such  heavy  decline.  On  the 
other  hand  the  low  level  of  '96-7  was  only  slightly  below  the 
low  level  of  '93,  so  that  a  trader  who  would  have  sold  stocks 
"short"  during  the  low  level  of  '93,  on  the  expectation  of  a  further 
fall,  as  in  '77 ',  or  the  investor  who  would  have  waited  for  such  a 
fall,  to  invest,  would  both  have  missed  their  market.  Conditions 
of  '93  were  better  than  conditions  of  '73,  and  the  downward 
course  of  prices  practically  halted  at  the  '93  level. 


INTRODUCTION  51 

Again,  the  rise  from  77  to  '81  was  just  twice  as  great  as 
from  '97  to  1902,  so  that  any  one  who  would  have  looked  to 
see  the  average  of  1901-2  rise  to  four  times  the  average  of  '97, 
would  have  miscalculated  sadly.  Action  and  reaction  are  more 
or  less  equal,  and  just  as  the  fall  of  '90- '97  was  less  violent  than 
the  fall  of  70-77,  so  the  rise  of  '97-1902  was  nothing  like  so 
tremendous  as  the  rise  to  1881. 

And  yet  further:  the  average  of  stocks  never  reached  the 
level  of  1881  again  for  an  even  20  years,  as  already  noted,  but 
the  top  level  of  1906  on  Dun's  list  was  4%  higher  than  in  1902,  and 
on  the  Wall  Street  Journal's  list  of  20  active  stocks  the  rise  was 
slightly  greater  (from  an  average  of  $129  to  an  average  of  $138 
per  share).  The  level  reached  in  1887,  the  highest  point  from 
1883  to  1899,  was  28%  below  the  high  level  of  1881. 

The  fall  from  the  top  level  of  1881  to  the  low  level  of  1884 
was  62%.  The  fall  from  the  top  level  of  1902  to  the  low  level 
of  1903-4  was,  on  Dun's  list,  only  29%  and  on  the  Wall  Street 
Journal's  list  only  31%. 

The  rise  from  the  low  level  of  '84  to  the  high  level  of  '87 
was  near  90%,  while  the  rise  from  the  low  level  of  1903  to  the 
high  level  of  1906  was  only  about  48% — one-half  as  great.  Here 
again  action  and  reaction  approximated  equality. 

It  is  clear,  therefore,  that  the  cycle  theory  is  available  only 
within  very  wide  limits  and  when  its  indications  are  checked 
and  rectified  by  constant  and  careful  examination  of  conditions. 

The  Outlook  (1907). 

With  these  very  extensive  reservations,  the  adventurous 
minded  may  make  some  sort  of  hazard  as  to  the  general  trend  of 
prices  for  the  next  ten  or  fifteen  years.  At  the  present  writing 
(May,  1907),  it  does  not  seem  probable  that  a  general  crisis, 
followed  by  a  long  depression,  is  yet  due.  There  is  much  to 
indicate  that  it  is  not  very  far  off.  The  strain  upon  banks  is 
heavy,  the  expansion  of  banking  capital  from  1896  has  been  so 
great  as  to  be  unhealthy,  the  inflation  of  credits  has  been  enor- 
mous, there  has  been  wild  speculation  in  real-estate,  still  wilder 
speculation  in  mining  shares,  there  has  been  a  rise  of  nearly  50% 
in  the  cost  of  living  and  the  general  commodity  list.  Prices  of 
real  estate  all  over  the  country  have  reached  almost  prohibitive 
figures,  and  a  heavy  fall  in  these  prices  is  reasonably  certain.  A 
current  despatch   reports  the  passing  of  a  thousand   emigrants 


52  INTRODUCTION 

a  day  through  Winnepeg  and  in  one  clay  the  Rock  Island  roacl 
took  out  of  Kansas  City  9,000  passengers  on  land-seekers  excur- 
sions. A  Kansas  banker  reports  that  at  present  land  prices  a 
farmer  cannot  make  over  5%  on  the  valuation  of  his  farm. 
Another  despatch  reports  10,000,000  acres  of  land  in  the  Canadian 
Northwest  held  by  speculators.  These  are  all  familiar  earmarks 
of  the  land  boom  of  the  '80s,  which  ended  so  disastrously  for  the 
■country. 

The  price  of  copper  has  been  almost  double  the  average 
price  of  but  a  few  years  ago.  The  price  of  cotton  is  approxi- 
mately double  the  low  levels  of  a  few  years  ago.  The  earnings 
of  the  United  States  Steel  Corporation  and  other  enterprises 
have  been  something  fabulous. 

This  huge  wave  of  prosperity  is  not  confined  to  the  United 
States  nor  North  America.  It  is  world-wide.  It  has  been 
equally  felt  in  Germany,  and  in  Egypt,  in  Italy  and  the  Argen- 
tine, in  South  Africa  and  Japan.  It  would  be  a  miracle  if  it 
were  not  followed  by  a  considerable  recession. 

Again,  the  past  few  years  have  shown  a  steadily  rising  flood 
of  immigration,  amounting  through  1906-7  to  an  average  of  over 
3,000  immigrants  a  day,  through  the  single  port  of  New  York. 
It  is  to  be  noted  that  such  a  heavy  rise  of  in-coming  population 
has  generally  preceded  a  period  of  depression.  Then,  too,  should 
the  summer  and  fall  of  190S  be  a  period  of  falling  markets,  it 
is  altogether  probable  that  a  change  of  administration  would 
take  place.  It  has  been  shown  by  the  writer  that  in  the  last 
forty  years  a  period  of  depression  and  declining  values  has 
invariably  resulted  in  such  change,  with  one  single  exception. 

If  a  business  decline  should  come,  it  is  obvious  that  the 
bubble  of  inflation  will  be  punctured.  Prices  will  fall  generally, 
simply  because  in  the  contraction  of  credits  which  must  ensue 
the  world  will  have  less  paper  capital  and  paper  profits  with 
which  to  buy.  With  the  prevalent  scarcity  of  money,  railway 
and  other  enterprises  will  postpone  heavy  improvements,  the 
demand  for  labor  will  be  slackened,  many  will  be  out  of  work 
and  this  will  impose  a  certain  tax  on  the  community  for  the 
support  of  the  unemployed. 

How  far  this  curtailment  of  business  will  proceed,  it  is 
obviously  impossible  to  forsee.  But  this  much  may  be  said  :  While 
business  conditions  all  over  the  world  are  generally  unsound,  it 


INTRODUCTION  53 

seems  certain  that  they  are  nothing  like  the  conditions  of  '90- '93. 
The  strain  upon  the  banks  is  heavy  but  it  is  nothing  like  the 
strain  that  preceded  the  crisis  of  '93.  It  seems  reasonable  to  infer, 
therefore,  that  if  a  sharp  and  severe  depression  should  now  ensue, 
it  will  be  short-lived,  and  the  recovery  rapid,  just  as  in  the  crisis 
of  1857. 

On  the  other  hand,  if  the  general  liquidation  of  commitments 
should  not  be  extensive,  if  the  business  recession  should  be 
mild,  it  is  easy  to  see  that  the  element  of  instability  would 
remain  and  that  we  should  skim  along  in  good  hope  to  a  more 
drastic  and  prolonged  depression,  such  as  followed  '93.  The 
majority  of  mankind  are  optimists.  It  was  clearly  a  sheer  and 
ungovernable  optimism  which,  in  the  face  of  banking  conditions 
and  the  over  extension  of  credits  shown  from  '90  to  '92,  produced 
in  '92  the  expectation  of  a  return  of  good  times. 

It  is  the  idea  of  the  writer  that  the  latter  may  be  more 
or  less  the  course  of  affairs  within  the  next  six  or  eight  years. 

Taking  a  long  look  ahead,  it  does  not  seem  improbable 
that  the  high  level  of  1906  will  not  again  be  reached  for  many 
years — possibly  not  before  1920.  There  are  many  forces  making 
for  this  result.  Merely  to  note  one,  it  is  obvious  that  with  the 
general  rise  in  commodity  prices,  materials  and  labor,  the 
cost  of  operation  of  railways  has  been  rising  steadily,  while  on 
the  other  hand  it  is  difficult  to  raise  railway  rates.  This,  of 
course  has  been  done,  and  rates  on  eastern  railways,  especially 
on  the  coal  roads,  in  1907  were  generally  25%  or  more  higher 
than  in  the  year  of  demoralization,  1899.  In  some  cases — as  in 
the  Baltimore  &  Ohio — they  were  50%  higher.  But  increased 
freight  rates  are  not  accepted  cheerfully  by  the  public,  and  in- 
creased passenger  rates  very  uncheerfully.  The  winter  of  1906-7 
saw  a  perfect  wave  of  hostile  legislation  sweeping  through  the 
various  state  legislatures  over  the  country.  All  of  this  legis- 
lation looked  towards  lower  rates  rather  than  higher,  in  the 
face  of  the  fact  that  farmers,  laboring  men,  manufacturers  and 
business  men,  generally,  were  getting  from  50%  to  100%  more 
for  their  commodities  than  ten  years  previously. 

High  cost  of  operation  means  decreased  earnings  and  a  much 
smaller  surplus  for  interest  and  dividends.  Were  a  prolonged 
period  of  business  depression  to  come,  this  would  mean  a  de- 
crease in  gross  earnings  as  well  as  in  net,  with  still  fiather  im- 


54  INTRODUCTION 

pairment  of  surplus.  All  this  need  not  be  viewed  with  any 
serious  alarm,  for  it  would  be  simply  suicidal  to  cripple  by  legis- 
lation, or  otherwise,  the,  greatest  single  industry  in  the  country — 
the  transportation  business,  and  even  the  years  of  depression 
bring  no  such  heavy  declines  in  railway  earnings  as  is  generally 
supposed.  The  decline  in  gross  earnings  from  the  top  level  of 
'93  (fiscal  year  closing  June  30th)  to  the  bottom  year  ('94)  was 
only  about  12%  all  over  the  country.  Freight  earnings  fell 
13.5%,  but  net  earnings  fell  only  11.4%,  the  succeeding  years 
showing  a  steady  rise  both  in  gross  and  net.  It  was  much 
heavier  than  this  in  the  unsettled  West,  but  it  was  correspond- 
ingly less  among  the  railroads  of  the  East. 

So,  while  it  may  be  the  part  of  over-optimism  to  look  for 
a  generally  higher  level  of  prices  than  1906  for  some  years  to 
come,  it  is  doubtful  if  any  depression  would  produce  so  heavy 
a  fall  as  in  1893,  just  as  the  fall  of  '93  was  less  than  the  decline  of 
73.  On  the  same  line  of  reasoning,  we  may  suppose  that  even 
in  a  period  of  general  depression  the  average  of  railway  prices 
would  scarcely  return  to  the  low  level  of  1903,  just  as  after  the 
high  prices  of  1887  they  did  not  quite  return  to  the  low  level  of 
1884. 

Both  the  rise  and  the  fall  in  the  period  of  1881-1901  was 
less  violent  than  in  the  preceding  20  years,  and  so  we  may  sup- 
pose that  the  fluctuations  in  the  period  from  1902  to  1922  will 
be  rather  less  violent  than  in  the  20  years  past.  In  other  words 
fluctuations  will  lie  within  narrower  limits.  This  will  tend  to 
decrease  the  opportunity  of  profit  between  buying  and  selling, 
but  on  the  other  hand  the  solidity  of  the  investment  will  be 
enhanced  and  the  risk  of  loss  will  be  lessened.  It  is  quite  cer- 
tain that  in  1907  the  railways  in  America  were  in  an  immensely 
more  stable  condition  than  at  any  time  from  1880  to  1890.  Their 
earnings  as  compared  with  their  capitalization  are  higher — that  is, 
the  amount  of  capital  required  to  carry  on  the  transportation 
business  of  the  country  is  proportionately  lower,  even  on  a  much 
lower  level  of  rates  than  20  years  ago ;  and  the  net  earnings  to 
the  shareholders  are  much  better.  It  is  quite  certain  that  in  a 
broad  way  each  cycle  shows  a  distinct  gain  in  the  stability  and 
profit  of  railway  investments. 

If  this  line  of  reasoning  be  correct,  and  if  the  experience  of 
the  two  broad  cycles  in   the  forty  years  since  the  close  of  the 


INTRODUCTION  55 

Civil  War  be  on  a  sound  basis  upon  which  to  estimate  the  course 
of  the  cycle  to  come,  it  does  not  seem  impossible  that  the  low 
level  reached  by  prices  in  1907  might  be  somewhere  near  the 
lower  limit  of  this  new  cycle. 

Prices  and  Investment  Yield. 

At  least  this  is  to  be  said :  if  the  dividends  paid  by  20  of  the 
solidest  dividend  paying  stocks  in  1907  be  averaged,  and  thi.-> 
average  dividend  be  divided  by  the  average  of  the  low  price 
individually  reached  by  each  of  these  stocks  in  March  of  1907,  it 
will  be  found  that  the  average  yield  to  the  investor  at  these  prices 
was  6.2%,  exceptionally  high-priced  stocks,  such  as  the  Dela- 
ware, Lackawanna  &  Western,  paying  20%,  being  excluded 
from  the  list,  as  being  of  too  great  individual  influence  on  the 
average. 

This  average  yield  of  6.2%  was  about  at  the  highest  which  a 
selected  20  solid  stocks  have  shown  in  more  than  20  years.  The 
yield  of  20  of  the  best  stocks  on  the  list  at  the  lowest  individual 
prices  reached  in  1893  was  practically  the  same  figure — 6.3%. 

The  yield  of  a  similar  list  of  solid  stocks  at  the  average  of 
the  individual  low  prices  of  1896  was  5.5%,  and  a  similar  list  at 
the  average  low  price  of  1903  showed  a  yield  of  5.2%. 

Estimation  of  values  upon  a  basis  of  dividends  is  not,  it  is 
true,  a  very  safe  or  reliable  test.  Still,  taken  through  a  series 
of  years  it  is  quite  certain  that  the  average  dividends  of  20  or 
more  roads  will  approximate  very  closely  the  actual  relative 
earning  power  of  those  roads ;  and  it  seems  certain  that  dividends 
in  1907  on  the  soHder  and  better  managed  roads  were  as  stable 
as  the  dividends  of  a  similar  class  of  roads  in  '93.  It  is  true  that 
following  the  spectacular  increase  of  the  Union  Pacific's  dividend 
in  August,  1906,  there  was  a  sort  of  wave  of  dividend  increases ; 
yet  this  could  scarcely  have  been  general  if  conditions  had  not 
seemed  to  justify  such  dividends  in  the  minds  of  a  fairly  con- 
servative body  of  men.  Probably  no  dividend  increase  excited 
more  unfavorable  comment,  aside  from  the  case  of  the  Union 
Pacific,  than  did  that  of  the  Pennsylvania;  and  yet  it  is  certain 
that  the  Pennsylvania  in  1906  was  better  earning  its  7%  dividend 
than  it  was  earning  its  6%  dividend  in  1905  and  preceding  years. 

The  meaning  of  all  this  is  that  in  March,  1907,  the  best 
railway  stocks  on  the  list  were  selling  on  the  same  basis  of  yield 


56  INTRODUCTION 

as  of  1893,  and  the  yield  of  1893  was  in  turn  the  highest  of  any 
year  in  the  period  from  1886  to  the  close  of  1906. 

In  a  broad  way  it  is  obvious  that  the  price  of  the  best  stocks 
as  compared  with  their  dividends  will  tend  to  approximate  the 
prevailing  rate  of  time  money;  that  is  to  say,  the  average  yield 
from  an  investment  in  stocks,  taken  year  in  and  year  out,  will 
tend  to  preserve  a  fairly  close  relationship  to  the  rate  obtainable 
on  good  loans.  Now,  it  is  quite  certain  that  there  was  nothing 
like  the  scarcity  of  money  or  bank  strain  in  1907  that  there  was 
in  '93.  Interest  rates  were  not  so  high.  In  '93  confidence,  which 
undoubtedly  plays  some  slight,  though  absurdly  exaggerated 
part  in  the  fixation  of  prices,  was  rudely  shaken  by  the  failure  of 
one  great  railway  company  after  another.  In  1907  there  was 
nothing  of  this. 

The  obvious  conclusion  in  the  mind  of  the  writer  is  this: 
A  prolonged  wave  of  prosperity,  resulting  in  such  a  prolonged 
bull  market  as  that  from  the  beginning  of  1904  to  the  close  of 
1906,  three  years  lacking  one  month,  is  generally  followed  by 
a  violent  fall  in  prices.  At  such  a  time  dividends  are  generally 
high  and  at  the  low  level  of  prices  reached  in  the  subsequent 
decline  the  yield  to  the  investor  is  apt  to  be  as  high,  if  not 
higher,  than  at  the  time  of  a  severe  depression,  when  money  is 
scarce  and  prices  seem  tumbling  to  a  bottomless  pit. 

It  may  well  be  that  the  general  dividend  level  of  1907  cannot 
be  maintained,  and  obviously  if  it  should  decline,  the  absolute 
level  of  stock  prices  might  decline  more  or  less  in  sympathy. 
Nevertheless  it  is  to  be  observed  that  if  an  extensive  liquidation 
of  committments  and  borrowings  were  to  ensue,  the  effect  of  this 
would  be  to  relieve  the  bank  strain  and  the  prevailing  scarcity  of 
liquid  capital.  Always  supposing  that  a  counteracting  force,  like 
the  depreciation  of  the  currency,  from  the  enormous  increase  in 
the  stock  of  gold,  be  not  actively  at  work,  this  would  mean  lower 
interest  rates  and  a  consequent  lowered  expectation  of  invest- 
ment reurn. 

A  decline  in  the  general  dividend  rate  might  therefore  not 
necessarily  imply  a  corresponding  decline  in  prices  and  we  should 
have  the  condition  foreshadowed  above,  that  is,  that  the  low 
levels  of  1907  might  represent  somewhere  near  the  low  level  of 
a  period  of  years. 

It  may  well  be  that  should  a  season  of  adversity  come,  stock 
prices  would  decline  still  further,  but  any  considerable  decline 


INTRODUCTION  57 

could  only  be  the  result  of  such  a  continuance  of  high  rates  for 
money  as  has  not  been  known  in  40  years.  Such  a  condition  might 
result  from  a  continued  or  increasingly  large  output  of  gold  and 
it  is  evident  that  the  gold  production  is  a  matter  meriting  the 
closest  attention  of  the  careful  investor. 

All  that  has  been  said  in  the  preceding,  concerning  the  gen- 
eral level  of  stock  prices  applies,  it  scarce  need  be  said,  only  to 
averages,  and  should  not  be  followed  too  implicitly  in  the  judg- 
ment of  individual  properties.  Even  though  the  general  level 
should  remain  below  that  of  1906  for  some  years,  individual 
properties  may  rise  far  above  the  level  of  1906.  On  the  other 
hand,  it  is  obvious  that  if  after  such  a  season  of  prosperity  as 
from  1898  to  1906,  a  road  could  not  in  the  climactic  year  of  1906 
show  fixed  charges  below  70%  or  75%,  it  was  pretty  certainly 
headed  for  a  receivership  in  any  very  serious  depression.  The 
stocks  of  such  roads  will  present  no  attraction  to  the  careful 
investor  at  any  price,  no  matter  whether  the  general  level  be 
high  or  low. 


'to1 


Prices  and  the  Increased  Supply  of  Gold. 

Such  in  broad  outline  seems  the  general  outlook  of  1907. 
Tbere  is  at  the  present  time  but  one  powerful  factor  working 
seriously  to  change  the  prospect — that  is  the  possible  depreci- 
ation of  the  currency  through  the  increase  in  the  gold  stock. 

Within  the  10  years  from  '96  to  1906  the  annual  production  of 
gold  has  more  than  doubled.  It  is  estimated  that  within  this 
period  the  world's  money  stock  of  gold  has  increased  nearly 
50%.  To  many  this  fact  is  of  profound  significance  and  to  this 
they  ascribe  the  quite  extraordinary  rise  in  prices  of  commodities 
and  the  like,  which  has  come  within  the  same  period.  So  there 
are  not  wanting  serious  and  sane-minded  prophets  who  look 
forward  to  20c  cotton,  to  still  higher  general  rates  of  interest — 
10%  even. 

Among  this  same  class  there  is  general  expectation  of  a 
still  further  rise  in  the  annual  gold  production,  from  $400,000,000 
to  perhaps  $600,000,000.  Even  the  most  careful  statistician  of 
the  subject,  Hon.  Geo.  E.  Roberts,  Director  of  the  United  States 
Mint,  looks  forward  to  an  average  production  of  four  hundred 
millions  per  year  through  the  next  ten  years.  That  this  enor- 
mous production,  if  continued,  would  mean  a  serious  depreciation 


58  INTRODUCTION 

of  the  money  standard  and  a  consequent  rise  in  prices,  is  without 
question. 

In  the  mind  of  the  writer,  however,  these  prospects  seem 
doubtful.  The  Germans  have  a  sententious  phrase  that  "No  tree 
ever  grows  quite  to  heaven."  When  the  balance  of  merchandise 
trade  in  favor  of  the  United  States  rose  from  a  debit  in  1896  to  a 
credit  of  $664,000,000  in  1901  there  were  not  lacking  serious 
observers  to  regard  the  situation  with  alarm.  The  United  States 
threatened  to  bankrupt  the  world.  But  even  in  the  face  of  a  still 
further  rise  in  commodity  prices,  which  of  course  swells  the 
nominal  figures  of  the  tables,  the  balance  has  fallen  considerably 
since,  and  it  will  probably  not  reach  the  level  of  1901  again  in 
many  years. 

So,  too,  it  may  prove  with  the  gold  industry.  That  gold 
mining  should  share  in  the  world-wide  expansion  of  business, 
seems  elementary.  There  are  few  industries  on  a  more  speculative 
foundation.  It  would  be  extraordinary  if,  with  the  general  out- 
break of  speculation  all  over  the  earth,  gold  mining  had  not 
taken  on  an  equal  activity.  When  this  world-wide  "boom"  has 
run  its  course,  when  the  speculative  fever  has  met  with  a  sharp, 
and  perhaps  serious  check,  it  seems  inevitable  that  the  gold  in- 
dustry should  show  a  similar  reversal. 

If  it  does  not,  it  is  fairly  certain  that,  with  perhaps  a  tempo- 
rary reversal  of  form,  prices  will  rise  still  further,  stock  values 
will  be  enhanced,  providing"  that  rates  can  be  correspondingly 
increased,  while  bonds  will  fall  still  more,  and  the  preva- 
lent high  rates  of  money  of  1906-7  will  look  low  in  comparison. 
There  is  no  more  interesting  question  now  engaging  the  atten- 
tion of  investigators,  and  the  point  is  one  which  every  intelligent 
investor  will  consider  with  care. 

The  Present  Solidity  of  the  Railroads. 

But  a  point  still  more  vital  to  consider  is  that  first  of  all, 
anticipation  (and  still  more,  apprehension)  tends  always  to  out- 
run the  reality,  and  secondly,  that  no  wave  of  prosperity  ever 
lifts  prices  quite  as  high  as  holders  for  a  rise  had  hoped,  and  no 
wave  of  depression  ever  affects  the  value  of  solid  securities  as 
seriously  as  the  familiar  connotations  of  "panic,"  "crisis"  and  "de- 
pression" would  suggest. 

For  the  matter  here  in  hand — that  of  railway  investments — 
it  is  to  be  noted  that  no  solid   and  honestly  managed  railroad 


INTRODUCTION  59 

was  ever  forced  into  the  hands  of  a  receiver  by  any  panic  what- 
soever. 

Practically  without  exception  a  great  failure  has  always 
meant  a  great  scandal.  It  has  meant  dishonesty  and  little  else. 
From  1892  to  the  close  of  1896,  about  56,000  miles  of  main  track 
out  of  a  total  of  about  180,000  passed  into  the  hands  of  receivers. 
But  this  included  huge  systems  like  the  Richmond  Terminal 
(now  the  Southern  Railway),  the  Wabash,  the  Erie,  the  Union 
Pacific,  the  Baltimore  &  Ohio,  the  Reading,  the  Atchison  and 
the  Northern  Pacific,  each  and  every  one  of  which  was  a  history 
of  disgraceful  stock  watering  or  stock  jobbing,  and  a  shame  to 
A-merican  railroading.  Four  of  these  failures,  as  the  above  cita- 
tion shows,  were  due  directly  or  indirectly  to  the  evil  influence 
and  criminal  practices  of  one  man.  Even  roads  like  the  Atchison 
were  found  actually  to  have  stuffed  their  gross  earnings;  the 
B.  &  O.  had  charged  actual  operating  expenses  to  construction 
and  capital  accounts.  So  heavily  had  the  Pacific  roads  been 
loaded  with  debt  that  in  the  fairly  prosperous  year  of  1892  the 
Union  Pacific  Railway  showed  fixed  charges  of  81%  and  the 
Union  Pacific  System  of  91%,  while  in  the  year  preceding  the 
system  had  failed  to  earn  its  fixed  charges.  Fixed  charges 
on  the  Northern  Pacific  in  1892  were  94%.  With  the  generally 
unstable  condition  of  the  banks,  loans  exceeding  deposits  by  25% 
and  more  through  the  three  years  of  1890-1893,  it  would  scarcely 
have  been  difficult  for  any  intelligent  observer  to  perceive  that 
these  roads  could  not  escape  a  receivership  and  that  their  securi- 
ties, their  stocks,  at  least,  were  next  to  worthless. 

But  the  great  body  of  American  roads,  covering  70%  and 
more  of  the  total  mileage  of  the  country,  stood  firm,  just  as  the 
better  part  of  American  roads  stood  firm  in  the  depression  of 
1873-77.  A  still  higher  proportion  will  stand  firm  through  any 
depression  to  come.  Fixed  charges  on  the  Union  Pacific  system 
in  1906  were  33%,  on  the  Northern  Pacific  29%,  on  the  B.  &  O. 
39%,  the  Reading  45%,  the  Atchison  42%.  These  roads,  it  is 
certain,  will  never  again  see  the  sheriff  at  their  doors. 

Not  all  the  reorganizations  were  as  successful,  and  some 
equally  disgraceful  stock  watering  and  stock  juggling  have 
brought  old  and  safe  and  finely  managed  properties  into  a  highly 
unsound  condition.  It  is  to  the  credit  of  present  day  railway 
finance  that  these  obvious  swindles  have  brought  the  securities 
of  these  properties  into  thorough  disrepute. 


60  INTRODUCTION 

But  it  is  safe  to  say  that  upwards  of  75%  of  American 
railway  systems  are  sound  and  stable,  and  this  is  undoubtedly  a 
percentage  which  no  other  business  in  the  country,  not  excepting 
the  banking  business,  could  show.  It  is  not  without  meaning 
that  roads  like  the  New  Haven,  the  New  York  Central,  the 
Pennsylvania,  the  Illinois  Central,  the  Chicago  &  Northwestern, 
the  St.  Paul  and  other  well-conducted  railroads  have  weathered 
the  storms  of  73  and  '93  with  no  serious  loss  to  their  share- 
holders. Dividends  have  been  passed  for  a  time,  but  they  have 
been  speedily  resumed  and  the  shareholder  who  has  not  been 
frightened    out    has    had    his    reward. 

Factor  of  Safety. 

There  remains  but  one  point  to  which,  in  view  of  the  con- 
ditions roughly  sketched  above,  the  writer  would  call  especial 
attention.  That  is,  that  the  investor  should  look  well,  always, 
to  the  factor  of  safety.  Before  he  puts  his  money  into  any  road, 
no  matter  if  it  be  on  the  recommendation  of  the  greatest  banker 
in  the  United  States,  let  him  consider  how  far  that  company  is 
prepared  to  weather  a  storm.  Few  roads  ever  prospered  under 
receivership,  no  matter  how  honest  or  how  able.  The  receiver- 
ship itself  is  a  handicap.  No  matter  how  high  the  yield,  no  in- 
vestor whose  primary  regard  should  be  the  safety  of  his  money 
will  put  it  into  a  road  whose  fixed  charges,  after  ample  charges 
for  maintenance,  consume  much  more  than  50%  of  the  total 
net  income  available  for  interest,  dividends  and  improvements — 
that  is,  save  in  exceptional  cases  like  the  New  York  Central — and 
until  he  has  satisfied  himself  thoroughly  that  the  property  is 
sound. 

For  the  convenience  of  those  not  well  acquainted,  the  fol- 
lowing list  of  the  principal  roads  is  given,  with  the  percentage  of 
total  net  income  consumed  by  fixed  charges  in  the  highly  pros- 
perous fiscal  year  of  1906. 

Table   of   Fixed   Charges. 

Atchison,  Topeka  &  Santa  Fe  42%  Chic.  &  Eastern  Illinois  68% 

Atlantic   Coast   Line  57%  Chicago  &  Northwestern  39% 

Baltimore  &  Ohio  39%  Chicago,  Burlington  &  Quincy  45% 

Boston  &  Maine  78%  Chicago  Great  Western  67% 

Canadian   Pacific  33%  Chicago,  Milwaukee  &  St.  Paul  32% 

Central   of  Georgia  47%  Chic.  St.  P.,  Minn.  &  Omaha  42% 

Central  R.  R.  of  N.  J.  50%  C,  C.  C.  &  St.  Louis  69% 

Chesapeake  &  Ohio  53%  Colo.  &  Southern  55% 

Chicago  &  Alton  73%  Delaware    &   Hudson  40% 


INTRODUCTION  61 

Del.,  Lackawanna  &  Western  38%       N.  Y.,  Chic.  &  St.  L.  41% 

Denver  &  Rio  Grande  52%       N.  Y.,  N.   H.  &  Hartford  48% 

Detroit,  Toledo  &  Ironton         87%       N.  Y.,  Ont.  &  Western  53% 

Duluth,  So.  Shore  &  Atlantic  115%       Norfolk  &  Western  37% 

Northern  Central  28% 

Northern  Pacific  29% 

Pennsylvania  38% 

Pitts.  &  Lake  Erie  11% 

Pitts.,  Cin.,  Chic.  &  St.  L.  54% 

Reading  45% 

Rock  Island  83% 

Rutland  69% 

St.  L.  &  San  Fran.  82% 

St.   L.   &  Southwestern  7695 

Seaboard  Air  Line  78% 

Sou.    Pacific  49% 

Southern  69% 

Texas   &  Pacific  407o 
Tol.,  St.  L.  &  Southwestern       61% 

Union  Pacific  31% 

Vandalia  54% 

Wabash  80% 

Wheeling  &  Lake  Erie  90% 

Wisconsin    Central  69% 

Importance  of  Fixed  Charges  to  the  Investor. 

The  high  degree  of  stability  imparted  to  interest  payments 
and  dividends  by  a  low  percentage  of  fixed  charges  and  the  high 
degree  of  instability  imparted  by  a  large  percentage,  is  so  ele- 
mentary that  it  would  seem  to  need  no  emphasis.  And  yet  this 
item  is  habitually  disregarded  by  perhaps  90%  of  bond  buyers 
and  stock  buyers.  On  this  account  it  may  be  worth  while  to 
illustrate  by  simple  comparison  the  effect,  for  example,  of  a  20% 
decline  in  gross  or  net  earnings.  We  will  compare  the  con- 
ditions of  two  roads  whose  Fixed  Charges  are  respectively  75% 
and  25%  of  the  total  net  income.     The  operation  would  be  as 

follows  :  Suppose  a  20%  Decline. 

Say  Earnings    ...$1,000,000  $800,000 

Exp.   (70%).      700,000  560,000 


Erie 

66% 

Grand  Rapids   &  Indiana 

76% 

Grand  Trunk 

65% 

Great   Northern 

26% 

Hocking  Valley 

31% 

Illinois    Central 

47% 

Iowa  Central 

79% 

Kansas  City  Southern 

54% 

Lake  Erie  &  Western 

69% 

Lehigh  Valley 

46% 

Long  Island 

101% 

Lake  Shore  &  Mich.  So. 

38% 

Louisville  &  Nashville 

54% 

Maine  Central 

46% 

Michigan  Central 

57% 

Minn.    &  St.   Louis 

77% 

Minn.,  St.  P.  &  Sault  Ste.  M. 

:irie   44% 

M.,  K.  &  T. 

75% 

Missouri  Pacific 

60% 

N.  Y.  C.  &  Hud.  River 

64% 

Net  $300,000  $240,000 

If  F.  C.  75%= 225,000  225,000 

Surplus  for  div $75,000  $15,000       (Case  I) 

Decrease 80% 

If  F.  C.  25%= 75,000  75,000 

Surplus $225,000  $165,000 

Decrease 26%     (Case  II) 


I 


62  INTRODUCTION 

It  will  be  seen  from  the  above  that  a  20%  decline  in  the  net 
earnings  would,  in  the  first  instance,  mean  a  decrease  of  80%  in 
the  surplus,  while  in  the  second  case  the  same  decline  would 
mean  a  decrease  of  only  26%  in  the  surplus — figures  which  suf- 
ficiently indicate  what  a  high  percentage  of  fixed  charges  means. 

In  this  connection  it  may  be  further  noted  that  in  the  large 
holding  companies,  like  the  Pennsylvania,  the  New  York  Central, 
the  Union  Pacific,  and  others,  the  factor  of  safety  and  the  surplus 
shown  tends  to  be  relatively  more  stable  than  in  companies 
largely  or  exclusively  dependent  upon  the  earnings  of  their  own 
roads.  This  is  due  to  the  general  custom  of  American  railways 
of  paying  out  in  dividends  only  a  part  of  the  actual  surplus 
earned.  From  this  it  results  that  dividends  are  much  more  stable 
than  earnings  and  that  the  income  of  the  holding  companies  from 
this  source  will  correspondingly  show  smaller  fluctuations  than 
earnings.  When,  therefore,  as  in  the  case  of  some  of  the  large 
holding  companies  named,  the  income  from  investments  repre- 
sents a  considerable  portion  of  the  total  net  income  shown,  the 
surplus,  other  things  being  equal,  will  be  much  more  stable  than 
in  other  companies. 

It  is  needless  to  add  that  this  stability  is  still  further  height- 
ened when,  as  in  the  case  of  the  Pennsylvania,  Union  Pacific 
and  some  other  roads,  the  percentage  of  fixed  charges  is  at  the 
same  time  low. 

Over  Capitalization. 

Perhaps  it  may  not  be  out  of  place  likewise  to  suggest  that 
investors  have  little  need  to  be  frightened  at  the  prevalent  hue 
and  cry  of  over-capitalization.  There  are  among  the  railway  com- 
panies many  instances  of  unquestionable  over-capitalization,  but 
taken  as  a  whole,  it  is  certain  that  the  capitalization  of  American 
railways  is  low. 

The  statistics  of  the  Interstate  Commerce  Commission  show 
that  at  the  close  of  the  fiscal  year  of  1905  there  was  outstanding 
a  total  of: 

Stocks    $6,554,557,051 

Bonds  and  Other  Obligations.  .  .     7,250,701,070 


Total $13,805,258,121 

On  the  basis  of  an  estimate  of  218,101  miles  of  main  track, 
this  is  equal  to  a  par  capitalization  of  $65,926  per  mile. 


INTRODUCTION  63 

The  report  further  shows  that  the  railway  companies  owned, 
of  their  own  and  other  corporations,  stocks  to  a  par  value  of 
$2,070,050,108  and  bonds  to  the  amount  of  $568,100,021,  or  a  total 
of  $2,638,152,129.  This  means  that  there  was  outstanding  in  the 
hands  of  the  public  a  little  over  $11,000,000,000  of  securities. 
This  would  mean  an  actual  net  capitalization  of  about  $54,000 
per  mile. 

But  this  is  the  net  capitalization  simply  of  the  mileage  of 
main  track,  and  does  not  take  into  account  all  the  second,  third 
and  fourth  track,  yard  trackage,  sidings,  &c,  of  which  there  was 
in  1905  nearly  100,000  miles  additional,  or  a  total  of  306,796  miles. 
If  the  net  capitalization  of  $11,200,000,000  be  divided  by  this  total 
mileage,  the  average  net  capitalization  would  be  reduced  to  about 
$36,000  per  mile. 

Now  it  is  quite  certain  that  in  1907  there  were  not  many 
places  in  the  United  States  where  a  good  railroad  could  be  laid 
down  and  equipped  for  operation  for  less  than  $20,000  per  mile. 
It  is  highly  improbable  that  the  railways  of  the  United  States 
could,  as  a  whole,  be  reproduced  for  an  average  of  $30,000  per 
mile,  bare  cost,  without  any  regard  to  terminal  facilities,  right  of 
way,  coal,  land,  timber,  steamship,  and  countless  other  holdings. 

For  the  proposed  extension  of  the  St.  Paul  road  from  the 
Missouri  River  to  Puget  Sound,  it  was  optimistically  estimated 
that  the  road  could  be  built  for  $50,000  per  mile — a  single  track 
line.  This  was  doubted  by  many  engineers,  and  the  St.  Paul  is 
one  of  the  best-managed,  and  its  gross  capitalization  per  mile 
among  the  lowest  of  any  railway  in  the  United  States.  It  is  quite 
certain  that  there  are  many  sections  of  the  Pacific  roads,  of  the 
Pennsylvania  lines,  &c,  which  could  scarcely  be  reproduced  at 
much  less  than  $75,000  per  mile. 

It  is  quite  certain  that  the  terminal  facilities  of  the  railways 
in  the  great  centers,  like  New  York,  Philadelphia,  Pittsburg, 
Chicago,  San  Francisco,  Seattle,  New  Orleans,  Galveston  and 
the  like;  the  right  of  way  for  lines  through  rich  and  long  settled 
states  like  Massachusetts,  New  York  and  Pennsylvania;  the 
enormous  coal  holdings  of  the  "anthracite  coalers,"  like  the  Read- 
ing, the  Lackawanna,  &c. ;  the  holdings  of  the  "soft  coalers" ;  the 
huge  land  holdings  of  the  Northern  Pacific  and  other  lines;  the 
ore  lands  of  the  Great  Northern;  the  steamships  of  the  Great 
Northern,  the  Southern  Pacific,  the  New  Haven,  &c,  taken  to- 
gether represent  a  property  valuation  rising  easily  into  the  bil- 


64  INTRODUCTION 

lions  of  dollars.  The  Pennsylvania  Railroad  is  spending  a  hun- 
dred millions  simply  to  put  its  tracks  under  Manhattan  Island. 
The  New  York  Central  is  spending  fifty  or  sixty  millions  on  its 
already  enormously  valuable  New  York  terminals. 

Practically  No  Watered   Capital. 

It  is  safe  to  say  that  the  railroads  of  the  United  States,  less 
the  market  value  of  their  holdings,  could  scarcely  be  reproduced 
today  for  their  actual  net  capitalization.  It  is  not  probable  that 
there  is  any  other  extensive  business  interest  in  the  United  States, 
or  for  that  matter  in  the  world,  for  which  such  a  claim  as  this  can 
be  made.  There  are  few  successful  small  industries  and  not  many 
large  ones  in  the  country  which  are  not  valued  at,  and  earning 
profits  on  a  valuation,  anywhere  from  five  to  fifty  times  their 
actual  physical  cost.  The  average  price  of  the  stocks  and  bonds 
listed  on  the  New  York  Stock  Exchange,  even  at  the  high  prices 
of  1906,  was  rather  below  par. 

It  seems  to  be  forgotten  likewise  that  a  considerable  part 
of  the  stock  capital  of  the  railways  still  represents  little  more 
than  possibilities,  that  even  in  the  flush  year  of  1905  on  only 
two-thirds  of  this  stock  capital  were  any  dividends  being  paid  at 
all,  and  that  in  1895  less  than  30%  paid  dividends.  The  average 
rate  on  all  the  railway  stocks  of  the  United  States  in  1905  was 
only  about  3%  and  in  1895  only  1.5%.  In  no  other  industry  are 
the  average  earnings  on  nominal  capital  so  low.  The  average 
country  merchant  or  small  shop  keeper  who  made  less  than  from 
15%  to  30%  on  his  invested  capital  would  picture  himself  as 
approaching  bankruptcy. 

The  cry  of  over-capitalization  can  have  its  origin  only  in  an 
utter  ignorance  of  industrial  and  economic  facts.  What  the 
average  clumsy  novice  at  corporation  tinkering  apparently  can 
never  understand  is  that,  as  a  rule,  over-capitalization  is  to  no 
one  so  harmful  as  to  the  company  itself.  This  fact  has  recently 
been  exemplified  by  the  Southern  Railway,  and  many  other  prop- 
erties. 

The  demands  for  dividends  on  watered  capital  are  rarely,  if 
ever,  a  factor  in  rate  making.  For  example,  the  percentage  of 
its  gross  earnings  paid  to  invested  capital  by  the  Chicago  & 
Alton  in  1906  was  actually  only  27%,  as  compared  with  40%  in 
1898,  the  last  year  of  the  Blackstone  management,  when  the 
Chicago  &  Alton  was  considered  a  low  capitalized  property;  and 


INTRODUCTION  65 

freight  rates  in  1906  were  22%  lower.  The  Chicago  &  Great 
Western  is  one  of  the  three  or  four  most  absurdly  over-capitalized 
railways  in  the  United  States,  and  there  is  not  a  line  in  the 
United  States  whose  average  rates  are  so  low,  or  show  so  small 
a  percentage  of  net  profit  from  actual  operations,  quite  disregard- 
ing the  return  on  the  capital  invested. 

The  present  writer  would  be  the  last  to  defend  such  deals  as 
that  of  the  Chicago  &  Alton,  the  Rock  Island  and  their  like,  but 
it  is  to  be  noted  that  the  wrong  is  to  the  investor — the  ignorant 
and  credulous  investor — and  not  to  the  shipping  or  travelling 
public,  not  to  the  people  as  a  whole.  There  is  nothing  to  show 
that  low  capitalization  means  low  rates;  and  it  is  highly  improb- 
able that  any  well-managed  property  will  suffer  from  hostile  or 
confiscatory  legislation. 

The  securities  of  over-capitalized  and  watered  companies 
tend  to  seek  their  natural  and  intrinsic  value,  and  the  investor 
in  railway  securities  has  far  more  to  fear  from  ill-judged  advice, 
from  "tips"  and  rumors,  from  enthusiasm  or  fright, — in  a  word, 
from  mistakes  in  his  own  judgment  or  from  failure  intelligently 
to  anticipate  the  course  of  business  conditions. 

He  has  little  to  fear  from  hysteria.  Waves  of  anti-railroad 
agitation  come  and  go  with  the  flux  and  reflux  of  the  business  tide ; 
but  the  roads  remain. 

It  is  not  without  interest  that  many  of  our  roads  have  now  been 
in  existence,  some  of  them  continuously  paying  dividends,  for  more 
than  half  a  century.  They  have  come  to  stay.  They  will  be  here 
at  the  end  of  another  half  century.  No  legislation  will  destroy 
them,  no  dishonest  management  will  materially  cripple  them,  and 
they  are  in  the  end  the  solidest,  safest  and  most  profitable  field  of 
investment  to  be  found  anywhere  in  the  world.  Taken  as  a  whole, 
they  are  managed  with  pre-eminent  skill  and  ability.  Taken  as  a 
whole,  they  are  honestly  managed.  To  the  shrewd  and  careful  in- 
vestor buying  when  their  shares  are  obviously  low  and  other  folk  are 
frightened  out,  selling  them  out  again  when  they  are  obviously 
too  high,  and  when  the  foolish  folk  who  sold  at  the  bottom  can 
see  only  the  most  roseate  future,  they  present  a  greater  oppor- 
tunity of  profit,  with  a  smaller  element  of  risk,  than  any  other 
form  of  property  in  which  he  may  place  his  surplus  funds. 


Note  On  "  Concealed  Earnings." 

In  the  spring  of  1907  it  became  increasingly  evident  that  the 
general  rise  in  wages,  cost  of  materials  and  supplies  was  telling 
heavily  on  the  operating  expenses  of  the  railroads  and  tending 
greatly  to  reduce  their  net  earnings,  in  spite  of  a  general  increase 
in  the  gross  business  done.  The  general  rise  in  commodity  prices 
is  computed  by  the  government  statisticians  at  from  40  to  50% 
since  1896.  The  tables  compiled  by  Dun's  Review  and  Bradstrect's 
confirm  this  conclusion.  Railway  officials  make  about  the  same 
estimates  for  their  own  operating  expenses. 

The  full  force  of  this  has  been  especially  felt  through  the 
year  of  1906-7;  and  nowhere  more  so  than  in  the  costs  of  main- 
tenance. An  examination  of  six  leading  railways  of  the  United 
States,  including  the  New  York  Central,  the  Pennsylvania,  the 
Illinois  Central,  the  Louisville  &  Nashville,  the  Atchison  and  the 
Southern  Pacific,  shows  that  maintenance  charges,  reduced  to 
their  element  units,  engine  and  car  mile,  have  increased  on  the 
average  50%  since  1900  and  in  some  instances  have  doubled. 

This  is  in  part  due  to  the  introduction  of  heavier  equipment, 
and  it  seems  to  be  forgotten  that  while  larger  cars  and  engines  have 
made  it  possible  to  keep  down  the  "cost  of  conducting  transpor- 
tation," they  have  necessitated  much  heavier  charges  for  roadwav 
and  repairs.  The  rest  is  due  largely  to  increased  costs.  It  is  evident 
that  all  this  represents  no  gain  whatever  to  the  stockholders  or  to 
the  road. 

The  practice,  therefore,  of  finding  large  concealed  earnings 
through  a  comparison  of  maintenance  charges  in  1906-7  and 
the  scale  of  some  six  or  seven  years  previous,  is  wholly 
misleading  and  investors  will  exercise  a  healthy  distrust  of  any 
such  showings.  It  was  the  concurrent  opinion  of  two  operating 
officials,  as  expressed  to  the  writer,  that  there  were,  save  in  ran- 
instances,  no  concealed  earnings  in  the  maintenance  accounts  of 
1906-7  generally. 


ALABAMA  GREAT  SOUTHERN  RAILROAD. 

The  Alabama  Great  Southern  is  a  part  of  what  is  known  as 
the  Queen  &  Crescent  route,  composed  of  the  Cincinnati,  New 
Orleans  &  Texas  Pacific  and  several  subsidiary  companies,  oper- 
ating between  Cincinnati  and  New  Orleans.  The  Queen  &  Cres- 
cent route  is  to  all  intents  a  part  of  the  Southern  Railroad  system 
and  a  large  majority  interest  of  the  Alabama  Great  Southern  is 
owned  by  the  Southern  Railway.  The  officers  and  directors  of 
the  line  are  largely  the  same  as  those  of  the  Southern. 

In  1906,  the  company  had  outstanding  the  following  securi- 
ties : 

Common  stock $  7,830,000 

Preferred   stock 3,380,350 

Total  stock $11,210,350 

Funded  Debt   1st  mtge.   6%    bonds 1,750,000 

Gen.  Mtge. 5  %  Sterling 3,207,600 

Certificate  of  funded  arrears  of  dividend 

on  pfd.  stock 399,464 

Equipment  Trust  Obligations 2,427,000 

Total  capital  and  funded  liabilities $18,984,414 

Total  capital,  per  mile $61,438 

The  company  directly  operates  309  miles  of  track  and  its 
gross  earnings  in  1906  amounted  to  $3,774,620,  or  $12,215  per 
mile. 

A  very  striking  characteristic  of  the  income  account  was 
the  fact  that  the  operating  ratio  was  81%,  both  for  1905  and  1906. 
Upon  examination  it  will  be  found  that  this  high  operating  ratio 
was  in  large  part  due  to  enormous  overcharge  for  maintenance, 
the  items  for  several  years  comparing  as  follows: 


Maintenance  per  Mile 

Traffic  Density 

Total 

Way 

Equipment 

1900-1 

645,726 

$     945 

$1,358 

$2,293 

1901-2 

713,696 

1,220 

1,413 

2,633 

1902-3 

792,919 

1,450 

1,539 

2,989 

1903-4 

947,443 

1,638 

1,945 

3,583 

1904-5 

1,019,806 

1,697 

2,241 

3,938 

1905-6 

1,179,828 

1,980 

2,819 

4,799 

Aver,  for  6  yrs 

883,236 

$1,488 

$1,885 

$3,372 

(67) 


68   ALABAMA  GREAT  SOUTHERN  RAILROAD 

On  a  road  of  this  traffic  density  it  is  probable  that  from 
$2,500  to  $3,000  would  have  represented  an  ample  maintenance 
charge,  so  that  the  surcharge  for  1906  was  probably  in  excess  of 
$2,000  per  mile.  This  on  309  miles  of  road  operated  was  equiva- 
lent to  a  total  of  $618,000. 

The  nominal  total  net  income  shown  was  $766,062  but  if  the 
amount  of  surcharge  indicated  above  be  added  to  this,  the  actual 
income  was  probably  in  excess  of  $1,350,000.  Interest,  rentals 
and  other  deductions  from  the  income  amounted  for  the  year  to 
$367,597,  which  would  represent  less  than  one-third  of  the  esti- 
mated actual  net  income,  leaving  a  very  large  margin  of  safety 
for  these  securities. 

Deducting  interest,  rentals,  &c,  from  the  estimated  net  income 
would  have  left  an  actual  surplus  of  around  $1,000,000.  The  6% 
dividend  on  the  preferred  called  for  only  $202,821,  so  that  the 
actual  earnings  on  the  $7,830,000  of  common  stock  was  in  the 
neighborhood  of  10%. 

Six  per  cent,  is  being  paid  on  the  preferred  stock,  no  dividend 
upon  the  common.  The  arrears  of  dividend  on  the  preferred  have 
been  funded,  so  that  there  are  no  longer  any  back  payments  to 
be  made  and  there  seems  no  reason  now  why  the  common  stock 
should  not  be  receiving  a  dividend. 

The  preferred  stock  may  be  regarded  as  a  solid  6%  security 
with  no  danger  of  its  dividend  payments  being  impaired.  As  to 
the  question  of  dividends  on  the  common,  that  is  a  matter  which 
will  probably  be  determined  by  the  exigencies  of  the  Southern 
Railway.  But  it  matters  very  little  to  the  holder  of  the  stock 
whether  the  surplus  of  earnings  is  put  back  into  the  improve- 
ment of  the  road  or  accumulated  as  cash  surplus,  or  paid  out  as 
dividends.  It  seems  fairly  obvious  that  a  5  or  6%  dividend  could 
be  paid  on  the  basis  of  the  earnings  for  1906  and  should  the  road 
continue  to  show  the  excellent  results  of  1906,  and  the  years 
immediately  preceding,  it  seems  altogether  likely  that  such  a 
dividend  would  be  declared  upon  this  stock. 

As  of  June  30th,  1906,  the  Southern  Railway  owned  $4,540.- 
050  par  value  of  this  common  stock,  so  that  it  would  have  a  very 
generous  interest  in  a  dividend,  if  it  were  to  be  declared.  Bought 
and  held  towards  such  an  eventuality,  at  below  40  or  50,  it  would 
seem  as  if  this  were  an  excellent  purchase. 


ATCHISON,  TOPEKA  AND  SANTE  FE 

RAILWAY. 

The  '"Atchison,"  as  it  is  familiarly  known,  is  one  of  the  great 
railroads  of  the  country,  the  only  one  owning  its  own  line  from 
Chicago  to  the  Pacific,  reaching  over  a  vast  territory,  and  now  after 
many  troublous  years,  becoming,  under  a  fine  and  conservative 
management,  a  magnificent  property.  It  has  been  extending  steadily 
within  the  last  ten  years,  and  year  by  year,  as  the  country  through 
which  it  runs  develops,  its  traffic  grows  more  and  more  varied,  and 
the  road  itself  thus  becomes  less  and  less  dependent  upon  any  single 
industry,  or  on  any  single  section.  The  Atchison  was  at  one  time 
the  largest  single  railroad  in  the  world,  and  though  under  fore- 
closure it  was  shorn  of  a  considerable  part  of  its  mileage,  it  still 
ranks  among  the  ten  greatest. 

History. 

The  Atchison  was  organized,  or  at  least  projected,  back  in  the 
war  days  by  a  daring  Kansas  promoter ;  but  it  was  some  time  before 
funds  were  secured  with  which  construction  of  the  road  could  be 
begun.  The  earliest  part  of  the  road,  from  Topeka  to  Emporia,  in 
central  Kansas,  was  not  opened  until  1870,  and  the  extension  be- 
tween Topeka  and  Atchison  in  1872.  The  company  had  been  en- 
dowed with  a  splendid  land  grant  in  case  the  road  was  completed 
as  projected,  by  1873.  In  the  ten  months  that  followed  the  opening 
of  the  line  to  Atchison,  the  company  carried  the  road  westward  340 
miles,  and  the  land  grant  was  saved.  It  was  a  feat  which  even  in 
America,  where  railroads  were  wont  to  be  built  with  lightning 
rapidity,  has  scarcely  any  parallel. 

In  the  depression  that  followed  the  road  suffered,  but  it  plucked 
up  courage  again,  and  in  the  early  eighties,  more  than  three 
thousand  miles  of  new  road  were  constructed ;  it  gained  control  of 
some  3,500  miles  of  other  road,  so  that  by  1887  it  was  operating 
over  6,000  miles.  The  extension  to  the  Pacific  was  then  begun,  and 
completed  in  1888;  and  by  1890,  through  the  lease  of  the  St.  Loui> 
&  San  Francisco  and  the  Colorado  Midland,  it  was  operating  over 
9,000  miles,  more  than  any  other  railroad  company  in  the  world. 

(69) 


70      ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY 

The  road  as  it  stood  then  was  largely  the  creation  of  President 
Strong,  whose  ability  and  daring  color  one  of  the  most  colorful 
chapters  in  American  railway  construction.  The  road  was  extended 
too  rapidly,  however,  for  safety,  and  in  1889  it  was  forced  to  a  re- 
organization, and  the  Strong  management  eliminated.  But  even  the 
reorganization  failed  to  put  it  on  a  solid  financial  basis,  and  in  the 
depression  which  followed  1893,  the  road  went  into  bankruptcy, 
and  was  reorganized  into  the  present  company.  The  St.  L.  &  S.  F. 
and  the  Colorado  Midland  were  cut  out  of  the  system,  and  one  of  the 
ablest  and  most  conservative  managers  of  the  country,  Edward  Pay- 
son  Ripley,  placed  at  its  head.  Since  that  time  the  record  of  the 
road  has  been  one  of  unbroken  and  splendid  growth,  with  gradual 
extension  as  the  needs  of  its  territory  demand. 

At  the  close  of  the  fiscal  year  of  1906,  the  road  was  operating 
8,444  miles  and  controlling  through  ownership  of  stocks  and  bonds 
auxiliary  lines  aggregating  1,093  miles,  with  393  miles  under  con- 
struction. Of  the  auxiliary  lines,  740  miles  were  included  in  the 
operating  reports  of  the  system,  instead  of  separately,  beginning 
July  1st,  1906,  making  a  total  of  9,184  miles. 

Of  this  total,  nearly  300  miles  is  double-track,  and  very  shortly 
the  entire  line  from  Chicago  into  central  Kansas  will  be  double-track 
road.  The  lines  of  the  system  extend  from  Chicago  through  Kansas 
to  Denver,  and  southward  through  Albuquerque  to  Los  Angeles  and 
San  Francisco,  with  various  branches  which  carry  the  road  to  El 
Paso  and  Pecos  City  in  Texas,  and  southward  from  Kansas  to 
Galveston  and  Matagorda,  with  branches  into  the  Beaumont  oil 
tields.  The  completion  of  a  short  bit  of  track  will  give  the  road  a 
second  line  from  Kansas  City  to  Albuquerque,  with  much  lower 
grades,  and  further  extensions  under  way  will  complete  the  Gal- 
veston-Albuquerque  line,  which  eventually  will  be  extended  to  Xew 
Orleans.  The  Atchison  will  then  parallel  the  Southern  Pacific 
throughout  the  Southern's  entire  length.  It  has  the  nucleus  of 
further  extensions  in  a  small  road  running  southward  from  Eureka 
in  northern  California. 

Ownership. 

The  Atchison  has  the  distinction  of  having  a  larger  number  of 
stockholders  than  any  other  railway  in  the  United  States  save  the 
Pennsylvania.  In  1905  it  reported  to  the  Interstate  Commission 
17,523  stockholders.  It  is  one  of  the  great  independent  roads  and 
long  remained  free  from  the  domination  of  any  special  interests.    In 


ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY       71 

1904,  however,  the  Union  Pacific  interests,  it  was  reported,  acquired 
$25,000,000  of  the  stock  in  order  to  insure  harmonious  relations  be- 
tween the  two  properties.  But  this  stock  was  not,  up  to  the  printing 
of  the  1906  report,  openly  held  by  the  Union  Pacific,  though  it  is 
very  well  known  that  the  Atchison  and  Union  Pacific  work  together 
in  very  friendly  rivalry. 

In  a  discussion  of  the  question  of  railway  control  in  the  United 
States  in  the  "Wall  Street  Journal"  in  1906,  it  was  accounted  that 
the  dominant  figures  in  the  Atchison  are  H.  H.  Rogers  of  Standard 
Oil,  E.  J.  Berwind,  a  great  coal  operator,  H.  C.  Frick  of  Pitts- 
burg, and  J.  P.  Morgan.  All  of  these  were  in  the  directorate  of 
the  road  save  Mr.  Morgan,  who  is  represented  by  Charles  Steele. 
The  other  directors  were:  Edward  P.  Ripley,  president;  Victor 
Morawetz,  chairman  of  the  board,  and  long  the  general  counsel 
of  the  road ; ;  Thomas  B.  Fowler,  persident  of  the  New  York,  On- 
tario and  Western;  George  G.  Haven,  a  New  York  capitalist;  H. 
Rieman  Duval,  a  director  of  the  Seaboard  Air  Line,  the  American 
Beet  Sugar  Company  and  other  enterprises,  New  York;  Byron  L. 
Smith,  of  Chicago,  a  director  in  the  Chicago  and  Northwestern; 
Benjamin  P.  Cheney  of  Boston ; ;  Charles  S.  Gleed  and  Howell 
Jones  of  Topeka ;  Andrew  C.  Jobes  of  Wichita,  Kan. ;  and  John  G. 
McCullough  of  Vermont,  also  director  in  the  Erie  Railroad.  The 
board  is  divided  into  four  divisions,  each  set  holding  for  four 
years,  so  that  the  control  of  the  road  would  not  immediately 
pass  even  though  any  single  interest  were  to  obtain  stock  control. 

The  make-up  of  the  executive  committee,  always  a  most  sig- 
nificant fact  as  indicating  the  location  of  control,  included  Victor 
Morawetz,  chairman,  also  a  director  in  the  Norfolk  and  Western ; 
Edward  P.  Ripley,  president  of  the  road ;  H.  H.  Rogers,  likewise  a 
member  of  the  executive  committee  of  the  St.  Paul  and  director  in 
the  Union  Pacific  road;  Charles  Steele,  a  director  in  the  Erie,  the 
Reading,  the  Northern  Pacific  and  other  Morgan  interests;  George 
G.  Haven,  a  director  in  the  Morton  Trust  Company  and  the  Na- 
tional Bank  of  Commerce  of  New  York,  the  Mutual  Life  Insurance 
Company  and  many  other  enterprises ;  Thomas  P.  Fowler  of  the 
N.  Y.  and  Ontario,  and  Edward  J.  Berwind,  also  a  director  in  the 
Morton  Trust  Company  and  in  the  National  Bank  of  Commerce, 
and  very  closely  associated,  though  not  a  director,  in  the  affairs  of 
the  Pennsylvania  R.R. 

It  will  be  seen  from  this  analysis  that  many  interests  are  repre- 
sented and  no  single  one,  apparently,  is  predominant. 


72      ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY 

Capitalization. 

With  stocks  and  bonds  amounting  to  and  selling  on  the  open 
market  for  nearly  half  a  billion  dollars,  the  Atchison  represents  one 
of  the  largest  single  companies  in  the  country.  Its  capital  account 
on  June  30th,  1906,  stood  as  follows: 

Common    stock $102,000,000 

Preferred    stock 114,199,530 

Total  stock $216,199,530 

Funded  Debt   (net,  including  auxili- 
ary lines) 280,378,300 

Total  capital $496,577,830 

Approx.  capitalization  per  mile $58,887 

Average  miles  operated 8,434 

Net  earnings  on  total  capitalization.  .  .  .  5.9% 

Stock   on   total    capitalization 43% 

Fixed  charges  on  total  net  income 42% 

Factor  of  safety 58% 

In  the  makeup  of  the  capitalization  table  both  the  rentals  paid 
and  the  securities  owned  are  so  small,  compared  with  other  items, 
that  they  may  be  neglected,  the  one  about  balancing  the  other. 

In  the  above  table  the  bonds  of  the  auxiliary  companies  not  held 
in  the  Atchison's  treasury  are  included,  to  the  amount  of  $5,732,500, 
and  also  the  bonds  of  some  leased  lines,  on  which  interest  is  paid  as 
rental,  to  the  amount  of  $1,708,000.  On  the  other  hand  the  Atchi- 
son's own  bonds,  to  the  amount  of  $2,528,436  held  in  its  treasury, 
have  not  been  included. 

On  the  basis  of  the  average  mileage  operated,  the  Atchison's 
capitalization  per  mile,  it  will  be  seen,  is  high  for  a  western  but  not 
for  a  Pacific  road,  though  the  figures  shown  would  be  reduced  by 
nearly  ten  per  cent,  if  the  740  miles  of  auxiliary  lines  of  the  road 
included  in  the  mileage  of  the  system  since  1906  had  been  taken  into 
consideration.  As  it  stands,  the  Atchison,  with  $58,887  per  mile, 
compares  with  $30,257  for  the  Chicago  and  Northwestern,  $33,900 
for  the  St.  Paul,  $28,600  for  the  Canadian  Pacific,  $73,992  for  the 
Union  Pacific,  and  $64,426  for  the  Southern  Pacific. 

That  this  capitalization  is  high  is  further  shown  by  the  per- 
centage which  the  net  earnings  represent  on  this  total  capitalization. 
The  Atchison's  figure  of  5.9%  compares  with  10.5%  for  the  North- 


ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY      73 


western,  9.7%  for  the  St.  Paul,  9.4%  for  the  Canadian  Pacific,  8. 
for  the  Union  Pacific,  and  6.6%  for  the  Southern  Pacific. 

The  amount  of  stock  nearly  balances  the  amount  of  bonds,  the 
stock  in  the  above  table  amounting  to  43%  of  the  total  capitalization. 
Included  in  the  Funded  Debt  is  over  $41,000,000  of  bonds  con- 
vertible into  common  stock  at  par  ($50,000,000  authorized)  and  as 
the  Atchison  common  rises  above  par,  this  conversion  will  probably 
take  place,  with  the  effect  of  reducing  the  funded  debt  and  increas- 
ing the  proportion  of  stock. 

That  the  drastic  reorganization  of  the  road  which  took  place 
with  the  foreclosure  of  1895  was  effectively  done  is  evidenced  in  the 
fact  that  in  1906  fixed  charges  consumed  only  42%  of  the  Total 
Net  Income.  This  leaves  a  Factor  of  Safety  for  the  underlying 
securities  of  58%. 

The  full  5%  dividends  on  the  preferred  consumed  about  20% 
of  the  total  net  income  of  1906,  so  that  there  was  still  left  a  com- 
fortable margin  of  safety  for  these  securities. 

Equities  Owned. 

The  Atchison  has,  pledged  as  security  for  the  funded  debt, 
$32,296,000  in  bonds  of  subsidiary  companies  in  which  the  chief 
item  was  $21,000,000  of  Gulf,  Colorado  and  Santa  Fe  bonds, 
and  in  addition  to  this,  stocks  of  a  par  value  of  $14,379,697,  its  un- 
pledged securities  amounted  in  1906  to  $2,837,000,  but  the  larger 
part  of  this  latter  item  is  the  two  and  half  million  dollars  of  the  com- 
pany's own  general  mortgage  bonds  already  referred  to. 

The  valuation  of  the  securities  pledged  is  not  given,  but  if  they 
were  taken  at  their  face  value  they  would  reduce  the  estimated  capi- 
talization of  the  company  by  about  10%. 

Increase  of  Capitalization. 

Since  the  reorganization  of  the  company  in  1895,  the  amount 
of  common  and  preferred  stock  has  remained  unchanged.  In  the 
six  years  from  1900  the  funded  debt  was  increased  mainly 
through  the  issue  of  $41,000,000  of  convertible  4%  bonds  (two 
issues)  sold  to  provide  funds  for  additional  construction  and  the 
general  betterment  of  the  system  and  $30,000,000  of  serial  deben- 
tures. In  the  same  period  the  gross  earnings  increased  nearly 
70%.    The  comparison  follows  : 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt 

Total 
Capital 

Gross 
Earnings 

1899-0 
1905-6 

$102,000,000 
102,000,000 

$114,199,530 
114,199,530 

$191,236,500 
275,484,800 

$407,436,030 
491,684,330 

$46,232,078 
78,044,347 

74       ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY 

Increase  over  six  years :  Total  capital,  21  %  ;  gross  earnings, 
68%.  At  the  beginning  of  1907,  the  issue  of  $100,000,000  new  con- 
vertible bonds,  with  a  corresponding  amount  of  stock,  to  be  held 
against  this,  was  authorized,  and  in  1907,  $26,000,000  of  these 
bonds,  bearing  5%  interest,  were  issued. 

Character  of  Traffic. 

In  former  times  the  Atchison  was  mainly  dependent  for  its 
revenue  upon  the  grain  fields,  but  the  impression  that  this  is  still 
true  is  erroneous.  A  very  interesting  change  has  come  over  the 
Atchison  traffic  within  ten  years,  the  various  items  of  this  change 
comparing,  in  per  cent,  of  tonnage,  as  follows : 


Products. 

Agricultural    

Animal    

Mines    

Forests  

Manufactures,  etc 

100%  100% 

It  will  be  seen  that  relatively  farm  products  and  cattle  shipments 
have  very  considerably  declined,  while  minerals,  lumber,  manufac- 
tures, etc.,  have  shown  a  considerable  increase. 

This  is  the  healthiest  sort  of  growth  and  it  may  be  expected 
with  the  steady  development  of  the  Atchison's  territory,  and  es- 
pecially the  development  of  its  rich  mineral  fields,  this  change  will 
be  progressive,  making  for  increased  stability  of  earnings. 

Stability  of  Earnings. 

It  will  be  seen  from  the  following  table  that  in  the  ten  full 
years  of  operation  as  a  reorganized  company  the  Atchison's  gross 
earnings  have  risen  more  than  160%,  while  the  earnings  per  mile 
have  very  nearly  doubled.  In  these  ten  years  the  earnings  per  mile 
have  shown  but  a  single  instance  of  decrease  from  one  year  to  an- 
other, and  that  too  slight  to  be  of  interest.  The  increase  for  1906 
over  the  preceding  year  was  especially  notable,  amounting  to  over 
12%.  But  this  was,  it  should  be  recollected,  a  year  of  extraordinary 
prosperity  for  all  the  railroads  of  the  country. 


1896. 

1906 

% 

% 

30 

24 

13 

8 

27 

31 

9 

13 

21 

24 

ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY      75 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896-7 

6,479 

*30,621,23u 

#4,752 

1897-8 

6,936 

39,214,099 

5,653 

1898-9 

7,033 

40,513,498 

5,760 

1S99-0 

7,341 

46,232,078 

6,297 

1900-1 

7,807 

54,474,823 

6,977 

1901-2 

7,855 

59,135,086 

7,528 

1902-3 

7,965 

62,350,397 

7,828 

1903-4 

8,180 

68,171,200 

8,333 

1904-5 

8,305 

68,375,837 

8,233 

1905-6 

8,433 

78,044,347 

9,253 

This  handsome  increase  in  earnings  did  not  result  from  any 
advance  in  freight  rates,  as  has  been  the  case  with  the  Pennsylvania 
and  other  eastern  roads,  but  was  in  the  face  of  a  distinct  though  no 
very  considerable  decline.  The  average  rates  per  ton  mile  received 
by  the  Atchison  have  been : 

Year.  Cents. 

1892    1.25 

1896   1.12 

1900   97 

1906   93 

As  the  Atchison's  territory  steadily  develops  in  railroads,  these 
rates  may  be  expected  to  decline  still  further,  but  it  is  obvious  that 
they  are  not  now  very  high,  for  the  west,  and  that  the  natural  gain 
in  business  ought  more  than  counterbalance  any  possible  reduc- 
tions in  rates  that  would  be  required. 

Maintenance. 

From  the  following  table  it  will  be  seen  that  the  total  appropri- 
ations per  mile  for  maintenance  have  increased  in  six  years  70%, 
while  the  traffic  density  in  the  same,  period  has  increased  only 
about  40%. 


Extra  main  track,  309  miles. 


76      ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY 


Traffic  Density 

Maintenance  per  mile 

Total 

Way 

Equipment 

Nor.  Pacific- 

729,102 

$1,300 

$    791 

$2,091 

Sou.   Pacific. 

594,898 

1,446 

1,246 

2,692 

Union  Pacific 

739,206 

1,173 

1,049 

2,222 

Rock  Island. 

462,106 

1,022 

759 

1,781 

Burlington... 

580,024 

1,104 

1,032 

2,136 

It  will  be  seen  from  the  above  comparisons  that  the  amounts 
expended  by  the  Atchison  per  year  compare  very  favorably  with  the 
Southern  Pacific  and  the  Union  Pacific,  the  former  of  which  es- 
pecially has  been  heavily  charged  for  improvements  in  its  operating 
expenses. 

That  the  Atchison's  charges  are  high  is  evidenced  in  the  items 
for  maintenance  of  equipment.  These  amounted  in  1906  to  $3,101 
per  locomotive,  $888  per  passenger  car,  and  $103  per  freight  car. 
These  are  very  high  figures,  and  can  only  mean  that  large  additions 
were  made  to  the  rolling  stock  of  the  company  under  the  guise  of 
maintenance. 

From  1903  to  1905  Atchison  suffered  very  severely  from  floods, 
and  the  increased  maintenance  charges  through  these  and  subse- 
quent years  represent,  in  part,  an  endeavor  to  repair  the  damage  that 
has  been  done,  out  of  earnings.  But  over  and  above  these  the  oper- 
ating expenses  of  the  Atchison  undoubtedly  show  considerable  con- 
cealed earnings,  which  probably  could  be  conservatively  estimated  at 
$500  per  mile.  Even  if  the  1906  average  were  reduced  by  this  sum, 
it  would  still  compare  favorably,  for  example,  with  the  St.  Paul  or 
the  North  Western.  This  on  8,400  miles  of  road  would  mean  con- 
cealed earnings  to  the  amount  of  over  $4,000,000.  That  an  item 
of  something  like  these  proportions  was  there  speaks  admirably 
for  the  management  of  the  road. 

Improvements. 

But  the  Atchison's  large  maintenance  charges  represent  only 
a  part  of  the  sums  which  have  been  expended  on  the  road  to  bring 
it  up  to  a  high  standard  of  efficiency.  From  the  surplus  earnings 
of  six  years  the  following  sums  have  been  deducted  : 

1900-1     Improvements $1,000,000 

1901-2  "  2.500,000 

1902-3  "  3,000,000 

1903-4  "  3,000,000 


ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY      77 

1903-4  Fuel  Reserve  Fund 239,500 

1904-5       "  "  "     319,000 

1904-5  Expenses,  Bond  sales 1,083,000 

1905-6  Improvements 4,500,000 

Fuel  Reserve  Fund 218,000 

Total $15,859,500 

In  addition  to  the  above  the  following  amounts  were  re- 
ceived as  net  proceeds  of  the  sales  of  lands  embraced  in  the 
Santa  Fe  Pacific  Land  Grant: 

1902-3  $579,700 

1903-4  570,400 

1905 681,300 

1906  366,800 

Total $2,198,200 

The  latter  amounts  were  directly  written  off"  the  book  value 
of  railroad  franchises,  etc.,  and  do  not  appear  in  the  income  ac- 
count. 

If  these  items  be  added  to  the  amounts  written  off  for  im- 
provements this  would  represent  a  total  of  $18,057,700  surplus 
earnings  turned  back  into  the  property  in  six  years. 

These  sums  are  not  large  when  compared  with  the  enormous 
amounts  required  annually  to  maintain  a  huge  system  like  the 
Atchison,  but  taken  into  consideration  with  the  heavy  mainte- 
nance charges  they  show  that  the  policy  of  the  road  has  consist- 
ently been  one  of  large  betterments  from  earnings. 

Ten  Years  of  Development. 

The  report  of  the  Atchison  for  1906  makes  an  interesting 
review  of  the  development  of  the  Atchison  since  its  reorgani- 
zation into  the  present  company.  Including  in  its  operations  the 
controlled  companies,  covering  an  aggregate  of  nearly  eleven 
hundred  miles  of  road,  the  following  are  the  increases  shown  for 
the  ten  years  ending  June  30th,  1906: 

Average  operated   mileage 47% 

Gross   earnings 165% 

Gross  earnings  per  mile 79% 

Net  earnings  from  operation  (before  charges) 296% 


78      ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY 

For  the  year  ending  June  30th,  1897,  there  was  no  net  in- 
come remaining  after  charges,  while  in  1906  the  net  income,  in- 
cluding the  undivided  income  of  the  auxiliary  lines,  after  deduct- 
ing all  charges,  amounted  to  $18,270,000.  This  was  equivalent  to 
the  full  5%  on  the  preferred  stock,  and  12.3%  on  the  common 
stock  outstanding. 

During  the  same  period  the  capital  obligations  of  the  com- 
pany were  increased  only  25%. 

In  this  same  period  the  Atchison  has  paid  out  in  dividends 
upwards  of  $60,000,000.  This  is  a  fine  showing  for  a  company 
which  in  1897  could  scarcely  meet  its  running  expenses  and 
charges. 

Surplus  Earnings. 

Disregarding  the  undivided  surplus  of  the  auxiliary  lines,  not 
a  large  item,  the  surplus  over  all  charges,  but  before  improve- 
ment appropriations,  has  been  as  follows : 


Dividends 

Per  cent. 

Dividends 

Average 

Year 

Surplus 

Paid  on 

Earned  on 

Paid  on 

Price 

Preferred  5« 

Common 

7.7 

Common 
3% 

Calendar  Year 

1900-1 

$12,474,529 

5 

34 

1901-2 

15,564,527 

^ 

9.8 

4 

70 

1902-3 

13,898,330 

5 

8.1 

4 

83 

1903-4 

15,359,771 

5 

9.6 

4 

72 

1904-5 

11,742,346 

5 

6.0 

4 

72 

1905-6 

17.733,209 

5 

11.8 

4 

87 

The  reduction  in  the  surplus  shown  for  1903-4,  and  especially 
in  1904-5,  was  due  to  the  heavy  losses  which  the  road  sustained 
from  floods.  This  is  stated  by  President  Ripley  in  his  reports 
to  have  amounted  in  1905  to  a  full  3%  on  the  common  stock. 
Heavy  improvements  and  special  constructions  have  been  made 
to  obviate  these  washouts,  so  that  the  recurrence  of  these  losses, 
at  least  in  any  such  magnitude,  can  hardly  be  expected.  Even 
in  the  face  of  these  losses  it  will  be  seen  that  the  surplus  shown 
on  the  common  stock  after  payment  of  the  full  5%  dividend  on 
the  preferred,  has  averaged  9%  in  these  six  years. 

Dividend  Record. 

Beginning  with  1880,  the  Atchison  began  to  distribute  large 
dividends,  and  in  1881  a  stock  dividend  of  50%  was  declared. 
Even  in  the  face  of  this  stock  increase,  dividends  were  maintained 


ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY      79 

at  6%  for  the  succeeding  6  years.  But  this  free-handed  policy 
brought  the  road  to  disaster  in  1889,  and  thereafter  no  dividends 
were  paid  until  the  reorganized  company  began  dividends  on  the 
preferred  in  1899.  In  1901  dividends  were  begun  on  the  com- 
mon.   The  full  record  is  as  follows : 

Common.  Preferred. 

%  Jo 

1879    3 

1880  sy2 

1881    6  and  50%  stock 

1882-6   6 

1887    6y4 

1888    5K 

1889-98 

1899    2% 

1900    4 

1901  zy2  5 

1902-5   4  5 

1906    5  5 

At  the  annual  meeting  of  1906  the  4%  dividend  on  the  com- 
mon was  increased  to  a  5%  rate,  through  the  declaration  of  a 
2^2%  dividend,  and  in  1907,  the  rate  was  still  further  increased 
to  6%. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906  the  balance  sheet  showed 
as  follows : 

Current  assets,  $23,141,559;  current  liabilities,  $16,924,944; 
leaving  a  working  balance  of  $6,216,615. 

This  is  a  very  favorable  showing,  especially  as  regards  the 
item  of  cash,  which  amounted  to  $17,321,750. 

The  balance  to  credit  of  Profit  and  Loss  at  the  close  of  the 
year  was  $19,985,482,  the  larger  part  of  which  could  be  figured 
as  cash. 

Investment  Value. 

The  preferred  stock  is  limited  to  5%  non-cumulative  divi- 
dends and  the  full  5%  has  been  paid  for  six  years.  In  the  last  five 
of  these,  the  net  surplus  remaining  over  and  above  these  pay- 
ments has  been  equivalent  to  about  8%   additional.     This  means 


80      ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY 

an  average  surplus  for  each  year  of  about  2l/2  times  the  amount 
required  for  the  preferred  dividend.  With  the  high  character  of 
the  Atchison  management,  its  heavy  maintenance  charges,  and 
the  writing  off  from  earnings  of  considerable  sums  for  improve- 
ments, Atchison  preferred  may  now  be  looked  upon  as  a  solid 
5%  stock,  likely  to  earn  its  dividend,  and  pay  its  dividend  even  in 
years  of  stress. 

With  money  ruling  at  4%,  Atchison  preferred  is  entitled  to 
sell  well  above  par.  As  a  matter  of  fact  its  average  price  in  five 
years  has  been  rather  below  par.  The  stock  sold  as  low  as  $58 
per  share  in  1900  and  $70  in  1901.  It  sold  up  to  $108  in  the  latter 
year,  declining  to  $84  in  the  slump  of  1903.  It  was  quoted  at 
$106  in  1906.  Though  the  dividend  is  limited,  control  of  the 
Atchison  would  be  a  coveted  asset  to  any  road  and  with  the  com- 
mon selling  at  the  same  figures  or  better,  it  may  be  expected  that 
the  preferred  will  sell  in  general  very  near  to  the  average  of  such 
stocks.  On  any  decline  below  par,  it  would  certainly  present  an 
attractive  purchase. 

When  Atchison  common  was  put  upon  a  4%  basis  in  1901,  it 
had  just  passed  through  a  crop  failure,  and  its  mileage  in  un- 
settled regions  was  greater  than  that  of  any  other  road  in  the 
country,  its  equipment  was  in  poor  shape,  and  the  road  in  need 
of  improvements.  The  disbursement  of  $10,000,000  per  anum  in 
dividends,  as  the  preferred  and  common  required,  at  such  a  time, 
was  a  doubtful  policy,  and  undoubtedly  the  road  would  be  in  a 
great  deal  better  shape  now  had  at  least  a  part  of  its  disburse- 
ments been  turned  back  into  the  road. 

The  Atchison's  policy  has  been  exactly  the  reverse  of  that 
of  the  Southern  Pacific,  which,  save  on  its  preferred,  paid  no 
dividends  whatever  up  to  1906,  while  its  earnings  have  enor- 
mously increased.  No  one  knows  better  than  a  railroad  man 
how  rapid  is  the  deterioration  of  railway  property  and  the  Atchi- 
son was  probably  in  little  better  position  than  the  Southern  Pa- 
cific when  the  Harriman  management  took  hold  of  the  latter. 

But  whatever  criticism  might  have  been  justifiable  in  1901 
scarcely  retains  its  force  in  face  of  the  unprecedented  prosperity 
of  subsequent  years.  In  1901  the  surplus  shown  by  the  Atchison 
for  its  common  stock  amounted  to  only  $880  per  mile ;  in  1906 
these  earnings  were  $2,100  per  mile.  This,  in  the  face  of  heavy 
increase  in  the  maintenance  charges,  seems  amply  to  justify  the 
increase  in  the  dividend  from  4  to  6%,  as  was  done  in  1906-7. 


ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY      81 

It  is  certain  that  a  6%  dividend  in  1906-7  had  a  far  solider  basis 
in  the  amount  of  surplus  income  than  had  a  4%  dividend  in  1901. 

Against  this  is  to  be  set  over  the  fact  that  the  six  years 
under  view  have  been  years  of  simply  phenomenal  prosperity.  It 
is  a  repetition  of  the  early  eighties.  In  the  early  eighties  Atchison 
was  paying  higher  dividends  than  it  has  ever  paid  since,  and  it  is 
interesting  to  recall  for  example,  that  in  1880  Atchison  was  sell- 
ing as  high  as  $148  per  share,  and  that  as  late  as  1887  it  sold  at 
$118  per  share ;  and  this  was  after  a  50%  stock  dividend  had  been 
declared  in  1881.  From  1893  to  1895  this  stock  habitually  sold 
at  from  $3  to  $5  per  share.  When,  after  two  full  years  of 
operations,  the  reorganized  company  had  shown  excellent  results, 
the  stock  could  still  have  been  picked  up,  in  1898,  for  $10  per  share. 
In  1901,  the  year  that  the  stock  was  put  upon  a  4%  basis,  it  was 
to  be  bought  for  $42  per  share,  and  for  as  low  as  $54  in  1903.  In 
1906  it  sold  at  $110. 

Meanwhile  in  more  ways  than  one  the  Atchison  is  winning 
its  right  to  the  title  sometimes  given  it  of  "The  Pennsylvania  of 
the  West."  It  is  to  be  observed  that  the  Pennsylvania  policy  is 
not  one  of  parsimonious  dividends,  nor  of  shrinking  from  heavy 
capital  expenses.  It  is  one  of  liberal  maintenance,  aggressive  ex- 
pansion, and  the  free  issue  of  stocks  and  bonds.  Such  a  policy  is 
far  safer  in  the  Atchison  territory  today  than  in  the  Atchison 
territory  of  1880  to  1890. 

It  seems  not  improbable  that  should  the  extraordinary  earn- 
ings of  1906  show  no  heavy  set-back,  Atchison  will  remain  on  a 
6%  basis.  If,  with  fine  earnings  and  excellent  prospects  the  stock 
on  a  4%  basis  should  average  for  the  four  years  previous  to  1906 
around  $80  per  share,  it  is  evident  that  on  a  6%  basis  it  would 
tend  to  sell  at  par  or  better.  The  high  price  of  1906  was  in  an- 
ticipation of  a  6%  dividend  and  when  only  a  5%  rate  was  declared, 
the  stock  fell  abruptly.  But  if  the  stock,  on  a  4%  basis 
could  sell  at  $54  to  $64  per  share  in  the  panicky  conditions  of 
1903-4,  it  might  show  a  considerable  recession  from  the  1906 
figures.     In  March  of  1907,  it  sold  at  $83. 

In  1906,  when  the  Baltimore  and  Ohio  went  to  a  6%  basis,  it 
still  failed  to  sell  above  $125  per  share.  And  the  Baltimore  and 
Ohio  stock  had  no  load  of  convertible  bonds  to  carry.  It  is  evi- 
dent that  as  soon  as  Atchison  common  sells  considerably  above 
par,  the  $50,000,000  of  4%  convertibles  will  be  turned  into  this 
stock.     While  this  would  decrease  the  Fixed  Charges  by  $2,000,- 

9 


82      ATCHISON,  TOPEKA  &  SANTA  FE  RAILWAY 

000,  the  percentage  of  Total  Net  Income  required  for  the  Fixed 
Charges  is  already  low,  so  that  this  would  have  very  little  effect. 
On  the  other  hand,  the  conversion  into  stock  on  a  6%  basis  would 
add  $3,000,000  more  to  the  dividend  requirements,  which  is  a 
considerable  sum  even  for  the  Atchison. 

The  investor  will  probably  conclude,  therefore,  that  while 
Atchison  6%  common  at  par  represents  a  fairly  solid  purchase, 
the  speculative  outlook  for  a  very  great  enhancement  in  the  price 
is  not  so  large  as  it  might  be  if  the  convertibles  were  not  in  the 
way.  But  on  any  sharp  declines  below  par  the  stock  would  un- 
doubtedly present  solid  investment  attractions. 

The  Convertibles. 

The  security  of  the  Atchison  convertibles  is  sufficiently 
shown  in  the  discussion  on  the  capitalization  of  the  road.  With 
total  Fixed  Charges,  including  these  bonds,  of  something  less 
than  half  the  Total  Net  Income,  it  is  obvious  that  the  earnings 
of  the  road  would  have  to  show  a  tremendous  slump  before  in- 
terest payments  on  these  bonds  would  be  endangered.  They  have 
not  the  safety  of  first  mortgage  bonds,  but  on  the  other  hand 
there  are  excellent  prospects  of  conversion  into  stock  of  much 
greater  value  within  the  next  ten  years. 

It  is  obvious  that  the  quotations  on  these  bonds  will  more  or 
less  follow  the  fluctuations  of  the  price  of  the  common,  and  on 
any  decline  in  sympathy  with  the  latter,  they  would  present  an 
excellent  investment  of  this  class. 


ATLANTIC  COAST  LINE  RAILROAD. 

The  Atlantic  Coast  Line  is,  without  doubt,  the  most  extra- 
ordinary railroad  organization  in  the  United  States,  if  not  in  the 
world.  Directly  this  company  operated  in  1906  4,333  miles  of 
rails,  but  it  owned  a  controlling  interest  in  the  Louisville  &  Nash- 
ville, operating  4,205  miles  of  rails  and  directly  controlling  about 
1,400  miles  more.  Jointly  the  Atlantic  Coast  Line  and  the  Louis- 
ville &  Nashville  lease  the  Georgia  Railroad,  operating  nearly 
600  miles  of  track,  and  in  addition  the  Louisville  &  Nashville  has 
a  half  interest  in  the  control  of  the  Chicago  Indianapolis  & 
Louisville  (the  Monon).  Altogether,  the  Atlantic  Coast  Line 
controls,  directly  or  by  ownership  of  a  half  or  greater  interest, 
11,781  miles. 

The  gross  capitalization  of  this  system  is  in  excess  of  400 
million  dollars,  and  the  control  of  all  this  enormous  property  is 
held  by  the  Atlantic  Coast  Line  Company  of  Connecticut,  merely 
a  holding  company,  with  but  $10,500,000  of  stock  outstanding. 
This  holding  company  owns  a  majority  of  the  capital  slock  of  the 
Atlantic  Coast  Line  Railroad.  In  1898  its  then  outstanding 
capital  stock  of  85,000,000  was  doubled  by  a  100%  stock  dividend, 
and  two  years  later,  that  is,  1900,  $10,000,000  of  4%  "certificates  of 
indebtedness,"  practically  the  equivalent  of  A°/o  bonds,  were  issued 
to  the  stockholders  as  a  second  100C  dividend.  That  is  to  say, 
the  original  holder  of  stock  in  the  road  would  now  have  twice 
the  amount  of  stock  and  an  equal  amount  of  4%  certificates,  or 
the  equivalent  of  four  times  his  original  investment. 

From  this  it  will  be  seen  that,  supposing  control  to  have 
been  held  by  a  single  interest,  this  would  have  required  originally 
an  investment  of  a  little  over  two  and  one-half  million  dollars; 
and  this  sum  would  now  be  represented  by  double  this  amount 
of  stock,  which  in  1906  sold  as  high  as  8167  per  share  (in  1905 
$170)  and  likewise  by  double  the  amount  in  4%  certificates,  a 
solid  security  worth  around  par,  with  money  ruling  at  A'  '<  .  That 
is.  the  holders  of  this  controlling  interest  might  in  the  interval 
have    soM    these    certificates    for    twice    their    original    investment, 

(■S3) 


84  ATLANTIC  COAST  LINE  RAILROAD 

and  thus  without  having  a  dollar  of  real  capital  invested,  still 
retain  control  of  a  company  which,  in  its  turn,  controls  over 
11,000  miles  of  railway,  with  four  hundred  millions  of  capital- 
ization. To  what  extent  the  original  five  millions  of  stock  of 
the  holding  company  represented  an  actual  outlay  of  capital,  the 
present  writer  has  not  been  able  to  ascertain ;  but  without  going 
further  back,  it  is  doubtful  if  any  such  amount  of  capital  has 
ever  been  developed  to  such  far-reaching  results  in  the  recent 
history  of  American  railroads. 

History. 

The  Atlantic  Coast  Line  Railroad  grew  out  of  the 
organization  of  the  Atlantic  Coast  Line  Company,  which  was 
organized  in  1889,  under  the  laws  of  Connecticut.  Its  purpose 
was  the  practical  consolidation  under  one  ownership  of  a  series 
of  Southern  roads  along  the  Atlantic  coast  and  included  the  old 
Wilmington  &  Weldon,  the  Charleston  &  Western  Carolina,  the 
Wilmington,  Columbia  &  Augusta,  the  Richmond,  Freder- 
icksburg &  Potomac  and  a  number  of  smaller  lines.  In  1898 
several  of  these  lines  were  amalgamated  into  the  Atlantic  Coast 
Line  Railroad  of  Virginia  and  the  Atlantic  Coast  Line  Railroad 
of  South  Carolina.  These  two  lines,  with  others,  were  finally 
consolidated  into  the  Atlantic  Coast  Line  Railroad  in  1900.  The 
Savannah.  Florida  &  Western  Railway,  before  known  as  the 
"Plant  System,"  owning  2.235  miles  of  road,  was  merged  in  1902, 
and  this,  with  a  number  of  smaller  mergers  brought  up  the  mileage 
directly  operated  in  1906  to  4,333  miles.  It  also  owns  a  one-sixth 
interest  in  the  Atlanta  (Georgia)  Belt  Line  Company,  and,  as 
noted,  leases,  jointly  with  the  Louisville  &  Nashville,  the  Georgia 
Railroad,  operating  571  miles.  The  purchase  of  the  Louisville 
&  Nashville  is  discussed  under  "Equities  Owned." 

The  Coast  Line  System  was  largely  the  creation  of  the  late 
Wm.  T.  Walters  of  Baltimore,  and  his  son,  Henry  Walters,  for- 
merly president  and  now  chairman  of  the  board.  As  illustrating 
the  enhancement  resulting  from  the  merger,  it  was  stated  in  the 
"Wall  Street  Journal"  that  an  investor  who  owned  in  1886  $10,000 
par  value  of  the  old  Wilmington  &  Weldon  stock,  then  having  a 
market  value  of  $17,500,  and  who  held  it  until  it  was  converted 
into  Atlantic  Coast  Line  Railroad  stock,  received  through  the 
various   consolidations   and    stock   distributions    which    followed, 


ATLANTIC  COAST  LINE  RAILROAD  85 

securities  of  a  market  value  of  about  $175,000.  In  other  words, 
the  increment  in  value  during  this  period  was  1,000%. 

The  lines  directly  operated  extend  southward  from  Rich- 
mond and  Norfolk  to  Tampa  and  Punta  Gorda  in  Florida,  with  a 
connecting  line  of  steamships  owned  by  the  company,  the  Penin- 
sular &  Occidental,  extending  to  Havana  and  Nassau.  Its  linei 
extend  westerly  to  Montgomery,  Alabama,  and  via  the  Georgia 
Railroad  to  Atlanta.  Throughout  its  greater  length  the  Atlantic 
Coast  Line  is  directly  paralleled  by  the  Seaboard  Air  Line  and  the 
Southern  Railway. 

As  already  noted,  the  majority  of  the  stock  of  the  Railroad 
company  is  owned  by  the  Atlantic  Coast  Line  Company  of  Con- 
necticut, which  in  turn  is  owned  largely  in  Baltimore  and  the 
South.  In  1906,  the  president  of  the  Connecticut  company  was 
Michael  Jenkins,  of  Baltimore,  and  Waldo  Newcomer  was  vice- 
president;  other  directors  were:  Henry  Walters,  Warren  De- 
lano, Jr.,  Alexander  Hamilton  and  N.  J.  James.  The  directors  of 
the  Railroad  company  included:  Henry  Walters,  chairman  of 
the  board ;  Alexander  Hamilton,  first  vice-president ;  Michael 
Jenkins,  Waldo  Newcomer,  Morton  F.  Plant,  representing  the 
Plant  estate;  F.  W.  Scott,  E.  B.  Borden,  Donald  McRae,  H.  B. 
Short,  J.  J.  Lucas,  J.  H.  Estill,  Warren  Delano,  Jr. 

The  property  is  very  closely  held,  and  in  1905  the  railroad 
company  reported  only  883  stockholders.  This  is  the  smallest 
number  for  any  large  system  in  the  United  States,  and  compares 
with  9,572  for  the  Southern  Railway  and  a  similar  number  for 
the  Illinois  Central. 

The  Atlantic  Coast  Line  system  stands  very  distinctly  apart 
from  other  roads  and  beyond  the  affiliations  brought  to  it  by  the 
purchase  of  the  Louisville  &  Nashville  control,  it  is  not  closely 
associated  with  any  other  systems  or  interests. 

Capitalization. 

In  1906  the  Atlantic  Coast  Line  Company  of  Connecticut 
had  outstanding : 

Stock $10,500,000 

Certificates  of  Indebtedness 13,000,000 

Total  capital $23,500,000 

As  of  June  30th,  1906,  the  capital  account  of  the  Atlantic 
Coast  Line  Railroad  was  as  follows : 


86  ATLANTIC  COAST  LINE   RAILROAD 

Common    stock $42,980,000 

Preferred    stock 1,596,600 

Class   A 1,000,000 

Total  stock $45,576,600 

Funded  debt : 

Mortgage     debt $77,708,850 

Certif.  of  Indebt 21,568,800 

L.  &  N.  Coll.  bonds 35,000,000 

Total    capital $179,854,250 

Securities  held 56,955,299 

Approx.  net  capitalization $122,898,951 

Approx.  net  capit.  per  mile $28,403 

Average   miles  operated 4,327 

Net  earnings  on  net  capital 7.1% 

Stock  on  net  capitalization 37% 

Fixed  charges  on  Total  Net  Income  57% 

Factor  of  Safety 43% 

It  will  be  seen  that  the  net  capitalization  of  the  Atlantic 
Coast  system  is  low,  more  nearly  approaching  that  of  the  suc- 
cessful roads  of  the  middle  west,  whose  average  capitalization  is 
around  $30,000  per  mile,  but  whose  mileage  earnings  on  the  other 
hand  are  around  half  again  as  great. 

The  estimate  of  $28,403  for  the  Atlantic  Coast  stands  against 
a  similar  estimate  of  $47,453  for  the  Seaboard  Air  Line,  $49,223 
for  the  Southern  Railway,  $39,684  for  the  Louisville  &  Nashville 
and  $31,771  for  the  Central  of  Georgia. 

The  fact  of  low  capitalization  is  further  evident  in  the  per- 
centage which  the  net  earnings  show  on  this  estimated  net  capi- 
tal. The  figure  of  7.1%  for  the  Atlantic  Coast  compares  with 
8.9%  for  the  Louisville  &  Nashville,  4.2%  for  the  Southern  Rail- 
way and  3.7%  for  the  Seaboard  Air  Line.  It  will  be  seen  that  the 
stock  represents  a  comparatively  small  share  of  the  gross  capital- 
ization and  about  37%  of  the  estimated  net  capitalization. 

On  the  other  hand,  the  Fixed  Charges  in  1906  consumed  only 
about  57%  of  the  Total  Net  Income,  leaving  a  nominal  Factor  of 
Safety  of  43%.  The  road  has  a  very  considerable  equity  in  its 
majority  interest  in  the  Louisville  &  Nashville,  so  that  in  point 


ATLANTIC  COAST  LINE  RAILROAD  87 

of  fact,  the  Factor  of  Safety  is  rather  higher  than  aboye  indicated. 
It  will  appear  further  on  that  all  of  these  estimates  are  on 
the  basis  of  rather  low  maintenance  charges ;  had  the  expendi- 
tures of  the  road  been  on  the  same  liberal  scale  as  generally  pre- 
vails over  the  country,  its  surplus  income  would  have  been  some- 
what reduced. 

Equities  Owned. 

In  1902,  the  Atlantic  Coast  Line  acquired  $30,600,000  of  the 
$60,000,000  outstanding  capital  stock  of  the  Louisville  &  Nash- 
ville Railroad,  a  majority  interest.  This  stock  had  been  pur- 
chased in  the  open  market  in  a  speculative  deal  by  John  W.  Gates 
and  his  associates.  The  latter  turned  it  over  to  J.  P.  Morgan  & 
Co.,  who  in  turn  sold  it  to  the  Atlantic  Coast  Line,  receiving  in 
payment  $10,000,000  cash,  $35,000,000  in  4%  50-year  collateral 
trust  bonds,  secured  by  the  deposit  of  the  stock,  and  $5,000,000 
par  value  of  Atlantic  Coast  Line  stock.  This  was  equivalent  to 
about  $163  per  share,  rather  higher  than  the  highest  market 
figure  ever  reached  by  this  stock,  either  at  the  top  of  1902  or 
1906,  which  was  $159  per  share.  It  was  considerably  higher  than 
the  highest  point  touched  during  the  competitive  buying  of  the 
stock  by  the  Gates  party.  It  was,  however,  undoubtedly  an  ex- 
cellent purchase.  The  Louisville  &  Nashville  is  out  and  out  the 
best  railroad  property  in  the  South.  It  has  for  some  years  been 
charging  its  maintenance  very  heavily  for  improvements  and  it 
has  actually  been  earning  rather  in  excess  of  15%  on  its  stock 
for  some  years.  Though  it  has  been  paying  only  6%,  it  might 
readily  pay  7  or  8%  and  thus  make  fair  return  to  the  Atlantic  Coast 
on  the  purchase  price  paid. 

It  has  frequently  been  assumed  that  the  Louisville  &  Nash- 
ville may  be  taken  over  under  lease  by  the  Atlantic  Coast  Line, 
in  which  case  all  of  the  surplus  earnings  would  go  to  the  leasing 
road.  It  is  probable,  however,  that  the  minority  shareholders  in 
the  Louisville  &  Nashville  would  hardly  be  satisfied  with  less 
than  8%  guaranteed,  so  that  with  the  increase  in  operating  ex- 
penses within  the  last  year  or  two,  the  surplus  might  not  be  large. 
It  is  quite  certain,  however,  that  in  any  event  the  Atlantic  Coast 
Line  has  in  this  property  an  asset  of  immense  value  and  undoubt- 
edly worth  much  more  than  the  purchase  price  paid. 

The  Louisville  &  Nashville  shares  are  carried  at  a  book  value 
of  $45,554,220    (the   additional   $5,000,000   paid    in    stock   being 


88 


ATLANTIC  COAST  LINE  RAILROAD 


omitted).  The  balance  of  the  sum  included  under  securities 
owned  is  chiefly  made  up  of  the  Atlantic  Coast  Line  Company's 
own  bonds,  held  in  the  treasury  and  therefore  representing  no 
equities. 

Increase  of  Capitalization. 

In  the  following  table  the  increase  of  capitalization  from  the 
year  of  the  consolidation  is  shown,  but  the  $35,000,000  of  Louis- 
ville &  Nashville  trust  bonds,  issued  in  purchase  of  that  road  have 
not  been  included.  On  this  basis  it  will  be  seen  that  the  increase 
in  capitalization  has  been  rapid,  but  the  increase  of  earnings  still 
more  so.    The  items  compare  as  follows : 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt 

Total 

Gross 
Earnings 

1900 

1906      .. 

$15,890,200 
42,9S0,000 

$18,390,300 
2,596,600 

$24,426,500 
99,277,650 

$  58,707,000 
144,854,250 

f  7,5S6,746 
24,868,448 

Net  increase  over  six  years :  Nominal  capital,  146%  ;  Gross 
earnings,  226%. 

In  March  of  1906  new  stock  to  the  amount  of  $4,557,600  was 
offered  to  the  stockholders  at  par,  to  10%  of  their  holdings.  The 
effect  of  this  was  to  increase  the  capital  stock  of  the  company  to 
very  closely  $50,000,000. 

Stability  of  Earnings. 

No  very  satisfactory  tabulation  of  the  earnings  of  the  system 
can  be  made  back  of  the  year  of  the  consolidation.  Since  then, 
mileage  and  earnings  have  compared  as  follows: 


Year 


1899  00. 

190U-1 . 
1901-2.  . 
1902-3 .  . 
1903-4. 
1904-5 .  . 
1905-6 .  . 


Miles 
Operated 

Gross 
Earnings 

Per     Mile 

1,759 

$7,586,746 

54,318 

1,756 

7,915,099 

4,507 

1,756 

8,549,526 

4,868 

4,139 

19,682,456 

4,756' 

4,192 

20,544,975 

4,901 

4,307 

22,222,903 

5,160 

4,327 

24,868,448 

5,747 

It  will  be  seen  that  the  increase  in  the  earnings  has  been  due 
mainly  to  the  extension  of  the  system  and  that  the  mileage  earn- 
ings, at  least  up  to  1906,  had  increased  rather  slowly.  There  was 
a  quite  notable  increase  for  the  year  of  1906. 


ATLANTIC  COAST  LINE  RAILROAD 


89 


There  is  one  characteristic  of  the  Atlantic  Coast  Line's  earn- 
ings that  must  be  considered  and  that  is  the  very  high  average 
rate  which  the  company  obtains.  The  average  per  ton  mile  for 
1906  was  1.13c,  which  is  among  the  very  highest  in  the  country 
for  any  large  system  and  almost  twice  the  average  rate  for  the 
country  at  large.  It  is  not,  however,  strikingly  higher  than 
that  received  by  the  immediate  competitors  of  the  road, 
comparing  with  1.12c  for  the  Seaboard  Air  Line.  .93c  for  the 
Southern,  .80c  for  the  Louisville  &  Nashville.  These  figures  com- 
pare, for  example,  with  the  average  freight  rate  on  the  Norfolk 
&  Western  of  .47c  and  of  .55c  on  the  Illinois  Central.  As  to  what 
extent  this  high  average  is  due  to  the  character  of  tiaffic,  the  very 
unsatisfactory  reports  of  the  company  give  no  clue.  The  average 
train  load  is  low,  amounting  to  168  tons  in  1906,  as  against  204 
for  the  Southern  and  230  for  the  Louisville  &  Nashville. 


Maintenance. 

From  the  following  table,  it  will  be  seen  that  the  traffic  den- 
sity of  the  road  is  very  small,  smaller  even  that  that  of  the  Sea- 
board and  hardly  a  third  that  of  the  Louisville  &  Nashville.  It 
would  be  expected  that  the  maintenance  charges  would  be  much 
lower  but  hardly  in  quite  the  degree  that  they  were.  The  items 
compare  as  follows : 


Traffic  Density 

Maintenance  per  Mile 

Year 

Way 

Equipment 

Total 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

213,685 
247,549 
258,100 
256,463 
272,087 
310,734 

259,769 

$619 

727 
723 
665 
731 
792 

$709 

$608 
538 
520 
440 
517 
714 

$556 

$1,227 
1,265 
1,243 
1,105 
1,248 
1,506 

Average 

$1,265 

Louisv.  &  Nash. 

Southern 

Seaboard 

929,594 
435,987 
311,366 

$1,490 
860 
620 

$1,537 
964 
611 

$3,027 
1,824 
1,231 

It  may  be  that  an  average  of  $700  per  mile  of  way  was 
adequate  for  a  road  of  this  traffic  density,  but  it  hardly  seems  as 
if  an  average  of  $556  per  mile  for  maintenance  of  equipment  was 
sufficient.    The  proof  of  it  may  be  assumed  from  the  fact  that  in 


90 


ATLANTIC  COAST  LINE  RAILROAD 


1906  the  road  found  itself  handicapped  for  rolling  stock,  and  at 
the  beginning  of  1907  was  obliged  to  sell  high  interest  bearing 
notes  for  the  purchase  of  further  equipment.  It  is  safe  to  say 
that  the  road  might  readily  have  spent  from  two  to  three  hundred 
dollars  more  per  mile  without  more  than  keeping  up  to  the  gen- 
eral level  of  successful  roads  over  the  country,  and  this  differ- 
ence on  four  thousand  miles  of  road  would  have  meant  a  differ- 
ence of  from  a  million  to  a  million  and  a  half  per  year  in  the 
amount  of  available  surplus  shown.  It  is  on  this  account  that  the 
showing  made  in  the  table  following  is  to  be  taken  with  some 
reserve.  This  conclusion  is  emphasized  by  the  fact  that  the  road 
has  not  followed  the  general  custom  of  other  roads  and  turned 
back  considerable  sums  from  improvements  into  earnings.  In 
other  words,  not  only  were  maintenance  charges  low,  but  the 
nominal  maintenance  charges  represented  all  that  was  put  into 
the  road  from  this  source.  There  were  no  special  appropriations 
from  the  surplus  to  make  up  for  the  somewhat  conservative 
policy  of  the  road  in  this  regard. 


Surplus  Earnings. 

With  the  reservations  noted  above,  the  funds  available  for 
dividends  have  shown  as  follows : 


Dividends 

Per  Cent. 

Dividends 

Year 

Surplus 

on  Preferred 

Earned  on 

on 

Average 

Stock 

Common 

Common 

Price 

1899-0 

$2,152,406 

2* 

1900-1 

1,755,980 

5 

5.4 

2* 

. . . 

1901-2 

2,270,257 

5 

3.4 

3* 

1902-3 

2,993,029 

5 

8.0 

5 

lie 

1903-4 

4,283,482 

5 

11.6 

5 

130 

1904-5 

4,669,712 

5 

10.4 

5 

145 

1905-6 

4,816,942 

5 

10.7 

6 

149 

It  will  be  seen  that  in  the  last  three  years  under  view,  the 
road  nominally  earned  rather  more  than  10%  on  its  common 
stock.  But  it  is  safe  to  say  that  under  a  more  liberal  maintenance 
policy,  these  figures  would  have  been  reduced,  perhaps  by  20  or 
30%. 

It  is  not  quite  clear  why,  with  such  rates  as  it  obtains,  earn- 
ings should  not  have  been  greater.  The  operating  ratio  for  1906, 
65%,  was  not  low  and  maintenance  charges  were  not  responsible. 
In  other  words,  the  line  is  apparently  an  expensive  one  to  operate. 


2/ 

2/2 

5 

3/ 

5 

5 

5 

5 

0 

5 

5 

6 

5 

ATLANTIC  COAST  LINE  RAILROAD  91 

Dividend  Record. 
The  following-  shows  the  dividend  payments  of  the  different 
classes  of  stock  from  the  year  of  the  consolidation  : 

Dividends 

Common 
Year.  (and  Class  A  certfs.)    Preferred. 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

The  amount  of  preferred  stock  has  been  steadily  diminishing, 
so  that  almost  the  entire  surplus  is  available  for  dividends  on  the 
common.  It  will  be  seen  that  after  three  years  as  a  5%  stock, 
late  in  1905  the  common  stock  was  put  on  a  6%  basis. 

In  the  period  under  view,  rights  of  very  slight  value  accrued 
through  the  issue  of  $8,500,000  of  stock  in  1902,  subscribers  being 
offered  this  stock  at  $125  per  share  to  the  amount  of  40%  of  their 
holdings;  in  1906,  $4,557,600  worth  of  stock  was  issued  to  the 
shareholders  at  par,  the  rights  on  the  same  showing  a  small 
premium. 

In  addition  to  the  above,  in  Jan.,  1905,  an  extra  dividend  of 
25%  was  paid  on  the  common  stock  of  which  20%  was  in  com- 
mon stock  scrip  of  the  railroad  company,  and  5%  in  certificates 
of  indebtedness  of  the  Atlantic  Coast  Line  Company  of  Con- 
necticut. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906,  the  balance  sheet 
showed  : 

Current    Assets $8,556,203 

Current    Liabilities 4,254,838 


Leaving  a  working  balance  of $4,301,365 

There  were  also  deferred  liabilities  of  $1,503,482,  partially 
offset  by  deferred  assets  of  $254,760.     The  amount  of  cash  was 


92  ATLANTIC  COAST  LINE  RAILROAD 

$5,118,029  and  the  amount  to  credit  of  profit  and  loss  was  $9,- 
297,363. 

Investment  Value. 

In  1902  the  preferred  stockholders  were  given  the  option  of 
exchanging  their  shares  at  the  rate  of  $100  of  preferred  stock  for 
$125  in  4%  certificates  of  indebtedness.  The  preferred  is  en- 
titled to  non-cumulative  dividends  of  5%.  Under  this  arrange- 
ment the  larger  part  of  the  preferred  has  been  so  exchanged, 
leaving  in  1906  only  $1,596,  600.  The  effect  of  this  change  was  to 
considerably  increase  the  fixed  charges  of  the  road  but  the  pro- 
portion of  total  net  income  consumed  by  fixed  charges  is  still 
reasonably  low  and  the  margin  of  safety  sufficiently  ample.  The 
preferred  may  be  regarded  as  a  solid  5%  stock,  entitled  to  sell 
under  normal  conditions  of  money  at  around  $125  per  share. 

The  common  stock,  now  on  a  6%  basis,  has  shown  very  high 
figures.  Even  after  the  stock  dividend  of  20%,  in  January,  which 
increased  the  common  stock  by  one-fifth,  it  sold  up  to  $170  per 
share  in  1905  and  to  $168  in  1906.  From  this  point  it  declined 
rather  steadily  under  the  general  pressure,  reaching  $112  early  in 
1907,  and  falling  to  $94  in  the  slump  of  March.  This  low  price 
was  accounted  for  partly  by  the  general  decline  in  securities, 
partly  by  the  necessity  which  this  road,  among  many  others, 
found  of  selling  three-year  notes  at  a  high  rate  of  interest.  It 
may  have  been  due  partly,  also,  to  the  feeling  that  the  road  had 
not  been  as  liberal  in  its  maintenance  charges  as  it  might  have 
been  and  that  the  showing  of  surplus  available  for  dividends  was 
somewhat  at  the  expense  of  skimped  maintenance  account. 

The  investor  in  Atlantic  Coast  has  further  to  consider  the 
fact  that  its  average  freight  rates  are  high  and  that  in  the  event 
of  a  general  determination  to  reduce  railroad  rates,  these  might 
have  to  be  considerably  scaled.  On  the  other  hand,  a  majority 
of  the  common  stock  is  owned  by  a  holding  company  and  this  is 
the  chief  source  of  the  revenues  of  that  company.  It  may  be  as- 
sumed, therefore,  that  the  6%  dividend  will  be  maintained  just 
as  long  as  the  earnings  of  the  company  could  possibly  justify  it. 
In  other  words,  the  investor  may  feel  that  the  controlling  interest 
of  the  road  is  in  "strong  hands"  and  that  his  interest  return  would 
be  guarded  by  the  fact  that  a  reduction  in  this  dividend  would 
be  of  much  more  consequence  to  the  holding  interests  than  to 
himself.     Even  supposing,  therefore,  that  a  more  liberal  mainte- 


ATLANTIC  COAST  LINE  RAILROAD  93 

nance  policy  would  have  somewhat  reduced  the  surplus  available 
for  dividends,  the  amount  still  remaining  would  be  quite  ample 
to  maintain  the  6%  basis  rate.  He  has  further  to  consider  that  in 
time  of  need  the  company  might  somewhat  enlarge  its  revenue 
by  raising  the  dividend  rate  upon  the  Louisville  &  Nashville,  an 
increase  which  would  be  amply  justified  by  the  great  earnings  of 
that  line. 

It  is  not  quite  clear  on  what  basis  the  very  high  quotations 
of  1905-6  were  reached,  save  on  the  theory  that  the  Atlantic 
Coast  Line  would  take  over  the  Louisville  &  Nashville  under 
lease  and  that  therefore  its  revenues  would  be  very  considerably 
augmented.  It  should  be  remembered,  however,  that  the  At- 
lantic Coast  has  only  a  bare  majority  and  probably  no  lease  could 
be  made  effective  which  did  not  amply  satisfy  the  minority  stock- 
holders. This,  as  already  noted,  might  readily  mean  an  8%  rate 
on  Louisville  &  Nashville,  and  though,  under  the  exceptionally 
prosperous  conditions  of  1906  this  would  have  left  a  large  surplus, 
this  surplus  might  not  be  so  heavy  under  less  favorable  con- 
ditions. 

Probably  from  all  this,  the  investor  will  conclude  that  At" 
lantic  Coast  is  a  fairly  solid  6%  stock,  but  with  no  such  prospect 
as  would  entitle  it  to  sell  much  above  the  general  level  of  other 
6%  stocks  of  the  same  character.  This  is  to  say,  that  probably 
under  the  high  money  conditions  prevailing  in  1906-7  the  stock 
would  tend  to  sell  rather  towards  the  low  figure  reached  in  the 
beginning  of  1907,  rising  to  considerably  higher  figures  were  the 
pressure  for  money  to  be  reduced  and  the  general  interest  rate  to 
decline  to  around  4%.  Supposing  such  a  decline  as  altogether 
probable,  the  stock  purchased  at  anything  like  the  figures  of  1907 
would  likely  show  a  handsome  profit  if  held  for  the  return  to 
more  normal  conditions. 

The  stock  of  the  Atlantic  Coast  Line  Company  of  Connecti- 
cut is  not  listed  on  the  Stock  Exchange  and  it  is  very  closely  held. 
The  balance  sheet  of  that  company  on  June  30th,  1906,  showed 
securities  and  other  assets  of  $43,666,711,  the  larger  part  of 
which  was  $24,257,000  of  the  common  stock  of  the  Atlantic  Coast 
Line  Railroad  Company  and  $1,009,300  of  its  preferred.  Against 
these  holdings  there  were  outstanding  about  $26,000,000  of  stock, 
certificates  of  indebtedness  and  open  accounts,  leaving  a  surplus 
to  the  credit  of  profit  and  loss  of  $17,575,802.  This  surplus 
sufficiently  reveals  the  strong  financial  position  of  the  company. 


BALTIMORE  AND  OHIO  RAILROAD. 

The  Baltimore  and  Ohio  was  long-  one  of  the  foremost  rail- 
roads of  the  country,  a  high  and  steady  dividend  payer  whose 
stock  was  prized  by  investors.  Wrecked  through  rate  wars  and 
incapable  management,  it  went  down  in  the  general  collapse  of 
1893-7,  and  its  rehabilitation  did  not  begin  until  the  introduction 
of  the  "Community  of  Interest"  idea. 

Few  of  the  larger  roads  of  America  have  shown  a  more  rapid 
development  in  the  period  that  has  intervened.  Since  the  road 
was  taken  from  the  hands  of  receivers  in  1899,  its  mileage  has 
been  doubled,  and  its  gross  earnings  are  nearly  three  times  as 
great.  It  follows,  therefore,  that  the  mileage  earnings  have  in- 
creased about  50%. 

The  very  remarkable  fact  about  this  astonishing  increase  in 
earnings  is  that  it  is  not  due  to  an  increasing  density  of  traffic  on 
the  road,  but  almost  entirely  to  an  increase  in  rates.  In  1899,  the 
bedrock  year,  the  average  freight  rate  received  by  the  Baltimore 
and  Ohio  had  fallen  to  .39c  per  ton-mile.  In  1904  it  was  .58c,  and 
in  1906,  .56c —  an  average  increase  of  nearly  50°/c.  This  increase 
is  practically  the  same  as  the  percentage  of  increase  in  the  earn- 
ings per  mile.  In  other  words,  had  the  rates  of  1899  been  in 
force  in  1906,  the  gross  earnings  of  the  Baltimore  and  Ohio  would 
have  been  eighteen  million  dollars  less  than  they  were,  and  the 
earnings  per  mile  would  have  been  practically  the  same  in  that  year 
as  when  the  road  was  in  the  receiver's  hands.  This  is  what  "Com- 
munity of  Interest"  has  done  for   one   American   road. 

By  far  the  larger  part  of  this  increase  in  rates  is  represented 
by  the  incease  on  a  single  commodity,  that  of  soft  coal  tonnage, 
which  produces  nearly  one-half  of  the  freight  traffic  of  the  road. 

History. 

The  Baltimore  and  Ohio  is  one  of  the  oldest  of  American  roads 
and  the  oldest  of  the  larger  roads  continuously  in  existence.      Its  re- 
port for  1906  was  its  eightieth  annual  statement  to  its  shareholders. 
The  mad  was  chartered  in  1827  and  its  first  section  opened  in  1830. 

(94) 


BALTIMORE  &  OHIO  95 

Its  construction  was  directly  instigated  by  the  completion  of  the  Erie 
Canal  and  it  was  assisted  by  loans  from  the  City  of  Baltimore.  It 
was  designed  as  a  road  from  tide-water  to  the  Ohio  River.  The 
original  project  was  conceived,  so  it  is  said,  by  George  Washington. 
The  road  consisted  of  iron-plated  wooden  rails  along  which  tramcars 
ran  "at  the  marvellous  speed  of  nine  miles  an  hour."  Soon  after  its 
inauguration  sails  were  tried  as  a  means  of  locomotion  but  speedily 
abandoned.  The  first  steam  drawn  train  dashed  along  at  the  rate 
of  ten  miles  an  hour,  and  in  1835  the  Baltimore  American  predicted 
that  "before  long  this  unprecedented  rate  of  speed  will  be  raised  to 
eighteen  and  even  twenty  miles  an  hour,  and  the  journey  to  the  Ohio 
will  some  day  be  performed  within  twenty- four  hours." 

The  modern  Baltimore  and  Ohio  was  largely  the  creation  of 
John  W.  Garrett,  who  was  its  president  from  1858  to  his  death  in 
1884.  His  son  Robert  succeeded  him,  and  was  killed  soon  after.  In 
1887  dividends  on  the  common  were  passed,  and  from  that  time  until 
the  final  collapse  of  1896,  profits  from  operation  were  swept  away 
through  the  persistent  recurrence  of  rate  wars.  There  was  a  heavy 
increase  of  capital  in  1891,  a  scrip  dividend  of  20%  and  other  de- 
vices of  "high  finance."  When  the  collapse  came  in  the  Spring  of 
1896,  it  was  found  that  current  expenditures  had  been  charged  to 
capital,  net  earnings  largely  stuffed,  and  Baltimore  and  Ohio,  which 
had  been  one  of  the  premier  investment  stocks  of  the  country,  sold 
at  $9  per  share. 

The  reorganization  was  consummated  without  foreclosure  and 
in  1899  the  road  was  returned  to  its  owners.  Soon  after  the  re- 
organization the  Baltimore  and  Ohio  Southwestern  was  consolidated 
with  the  parent  road,  and  control  was  gained  of  the  Cleveland, 
Lorain  and  Wheeling;  and  several  other  minor  roads  were  absorbed. 

In  1906  the  Baltimore  and  Ohio  directly  operated  4,000  miles 
of  rails,  of  which  nearly  1,200  miles  were  double-tracked;  and  it 
controlled  through  stock  ownership  about  500  miles  more.  Likewise 
through  its  ownership  of  one-half  of  the  working  control  of  the 
Reading,  its  influence  extends  over  the  Reading-Central  New  Jersey 
system,  and  through  the  latter  its  trains  obtain  entrance  into  New 
York. 

The  principal  line  extends  from  Philadelphia  through  Baltimore 
westward  through  Maryland,  forking  at  Cumberland  into  two  main 
branches,  one  extending  to  Pittsburgh,  Lake  Erie  and  Chicago ;  the 
other  through  Cincinnati  to  Louisville  and  St.  Louis.  Enormous 
sums  have  been  expended,  especially  since  1900,  amounting  to  the 


96  BALTIMORE  &  OHIO 

practical  reconstruction  of  the  road,  with  heavy  rails,  heavy  equip- 
ment, and  the  development  of  the  road  to  the  high  standard  of 
efficiency  of  the  Pennsylvania  lines. 

Ownership. 

In  1900  and  1901,  the  Pennsylvania  obtained  practical  control  of 
the  road  through  the  purchase  of  large  blocks  of  stocks  and  since  that 
time  Pennsylvania  influence  has  been  dominant  in  the  affairs  of  the 
road.  On  January  1st,  1906,  it  held  $30,293,300  par  value  of  the 
common  stock,  and  $21,480,000  par  value  of  preferred  stock ; 
through  the  Pennsylvania  Company,  $5,000,000  preferred,  and  $11,- 
044,600  common,  and  through  the  Northern  Central  and  the  Phila., 
Baltimore  and  Washington  (one-half  each)  of  $2,000,000  preferred 
and  $1,562,000  common,  or  about  $71,000,000  out  of  a  total  of 
$185,000,000  of  stock. 

In  the  fall  of  1906  it  was  announced  that  the  Pennsylvania  had 
disposed  of  about  400,000  shares  of  its  Baltimore  and  Ohio  holding 
together  with  about  one-half  its  holding  in  the  Norfolk  and  Western, 
to  Messrs.  Kuhn,  Loeb  and  Company:  further,  that  this  stock  had 
been  taken  over  by  Harriman-Union  Pacific  interests,  who  were 
understood  to  be  already  large  holders  of  stock  in  the  road ;  Messrs. 
Harriman  and  Stillman  had  been  for  some  time  on  the  board  of 
directors. 

This  purcnase  was  generally  accepted  as  indicating  a  purpose 
i  >n  the  part  of  the  Union  Pacific  interests  to  hold  a  trans-continental 
line  in  imitation  or  in  competition  with  the  Gould  transcontinental. 

In  1906,  the  board  of  directors  was  made  up  of  four  representa- 
tives of  the  Pennsylvania :  John  P.  Green,  James  McCrea,  Samuel 
Rea  and  John  B.  Thayer ;  and  these  with  Oscar  G.  Murray,  presi- 
dent, and  George  F.  Randolph,  vice-president,  made  the  Pennsyl- 
vania interests  dominant  in  the  Board.  With  the  sale  of  the  Penn- 
sylvania's holdings,  Mr.  Thayer  retired  and  was  succeeded  by 
Joseph  R.  Foard,  president  of  the  Foard  Lighterage  Company  of 
Baltimore.  The  other  directors  were :  Charles  Steele,  representing 
the  Morgan  interests :  Xorman  B.  Ream,  prominent  in  the  Erie 
management,  and  also  closely  associated  with  Morgan  interests ; 
James  Speyer,  of  the  banking  house  of  Speyer  and  Company ;  Ed- 
ward H.  Harriman,  also  a  director  in  the  Erie  and  the  Delaware 
and  Hudson ;  James  Stillman,  also  a  director  in  the  New  York 
Central,  the  Delaware  and  Lackawanna,  the  Union  and   Southern 


BALTIMORE  &  OHIO  97 

Pacific ;  and  Edward  R.  Bacon,  vice-president  of  the  subsidiary 
Baltimore  and  Ohio  and  Southwestern. 

Mr.  Jacob  H.  Schiff,  of  Kuhn,  Loeb  and  Company  had  been  a 
director  up  to  1906,  but  resigned  in  that  year,  and  his  place  was 
taken  by  R.  Brent  Keyser,  of  Baltimore.  In  the  same  year  the 
Baltimore  and  Ohio  acquired  by  purchase  55,000  shares  of  stock  of 
the  Washington  Branch  road  held  by  the  state  of  Maryland,  through 
which  the  state  of  Maryland  had  been  entitled  to  two  representatives 
on  the  board  of  directors,  and  these  two  representatives  of  the  state 
were  therefore  retired. 

For  so  large  a  road  the  stock  of  the  Baltimore  and  Ohio  is  not 
widely  held  as  in  former  days,  the  company  reporting  7,132  share- 
holders in  1905,  as  against  44,000  for  the  Pennsylvania. 

Affiliations. 

When  the  Pennsylvania  had  also  acquired  practical  working 
control  of  the  Norfolk  and  Western,  and  become  dominant,  with 
the  Vanderbilt  interests,  in  the  Chesapeake  and  Ohio,  and  when  in 
turn  the  Baltimore  and  Ohio  had  gained  control  of  the  Reading, 
through  stock  ownership,  this  brought  all  of  the  eastern  soft  coal 
roads  under  practically  a  single  ownership.  To  this  is  due  the  re- 
generation of  the  Baltimore  and  Ohio,  as  well  as  the  Chesapeake  and 
Ohio,  and  the  Norfolk  and  Western.  In  1899,  the  Baltimore  and 
Ohio  was  receiving  on  its  soft  coal  tonnage  only  .26c  per  ton-mile ; 
in  1906  the  average  rate  was  .40c — an  increase  of  more  than  50%. 
The  general  increase  of  rates  has  been  parallel  to  this,  so  that  the 
average  of  all  tonnage  has  been  raised  by  about  50%. 

In  the  case  of  these  southerly  roads,  community  of  interest 
amounts  practically  to  single  ownership,  with  the  absolute  elimin- 
ation of  competition  throughout  the  very  extensive  territory  covered 
by  the  Pennsylvania,  Reading  and  Baltimore  and  Ohio  lines.  In 
1905,  and  1906,  this  monopoly  was  broken  through  the  purchase  of 
the  Western  Maryland  by  the  Goulds;  by  the  construction  of  the 
Deep  Water  and  Tide  Water  railroad  by  Mr.  Rogers,  and  the  situ- 
ation was  further  complicated  by  the  Union  Pacific's  purchase  of 
Baltimore  and  Ohio  stock. 

Capitalization. 

Under  the  reorganization  and  subsequent  consolidations,  the 
capital  account  of  the  Baltimore  and  Ohio's  lines  were  greatly  sim- 
plified, so  that  the  balance  sheet  of  the  company  presents  the  exact 
capitalization.    On  June  30th,  1906,  this  account  stood  as  follows : 


98  BALTIMORE  &  OHIO 

Capitalization. 

Common   stock $124,580,000 

Preferred    stock 60,000,000 

Total  stock $184,580,000 

Funded   debt 246,849,430 

Assumed  debt 11,177,416 

Total  capital $442,606,846 

Securities    held 50,721,919 

Approx.   net  capital $391,884,927 

Approx.  net  capital  per  mile $97,241 

Average  miles  operated 4030 

Net  earnings  on  net  capital 7.1% 

Stock  on  net  capitalization 47% 

Fixed  charges  on  total  net  income.  .  39% 

Factor  of  Safety 61% 

In  the  above  estimate  of  capitalization,  the  new  issue  of  $27,- 
750,000  of  common  stock  has  not  been  included.  Issued  in  April  of 
1906,  only  a  little  more  than  $10,000,000  had  been  paid,  and  this 
stock  has  been  omitted  because  it  did  not  share  in  the  earnings  or 
in  the  dividends  of  the  fiscal  year  of  1906. 

Though  the  securities  owned  are  carried  on  the  books  at  con- 
siderably below  their  actual  value,  they  are  entered  in  the  above 
table  at  the  company's  estimate. 

It  will  be  seen  that  the  estimated  net  capitalization  is  neither 
high  nor  low.  With  gross  earnings  on  the  road  of  $19,000  per  mile, 
its  $97,241  of  net  capital  per  mile  of  road  compares  with  $145,000 
for  the  Pennsylvania,  with  gross  earnings  of  $37,661  per  mile.  This 
same  figure  compares  with  $96,108  per  mile  for  the  Norfolk  and 
Western,  whose  mileage  earnings  are  considerably  lower,  and  with 
$77,142  per  mile  for  the  Chesapeake  and  Ohio. 

Comparing  the  net  earnings  of  these  four  roads,  it  will  be  seen 
that  their  estimated  net  capitalization  is  on  a  very  even  basis.  The  net 
earnings  of  the  Baltimore  and  Ohio  represent  7.1%  on  the  net  capi- 
talization ;  the  Pennsylvania  8.1%  ;  the  Norfolk  and  Western,  6.4%  ; 
and  the  Chesapeake  and  Ohio  7%. 

The  Baltimore  and  Ohio  collapsed  in  1896,  not  because  of  any 
large  shrinkage  of  earnings  but  from  the  fact  that  its  Fixed  Charges 
had  been  eating  up  steadily  increasing  proportions  of  its  net  income, 


BALTIMORE  &  OHIO  99 

until  finally  default  was  made.  In  the  reorganization,  Fixed 
Charges  were  heavily  scaled,  so  that  at  the  present  time  the  stock 
represents  very  nearly  one-half  of  the  net  capitalization,  while  the 
Fixed  Charges  consume  only  about  40%  of  the  net  income,  leaving 
a  Factor  of  Safety  for  the  underlying  securities  of  about  60%. 

It  should  be  understood,  however,  that  the  Factor  of  Safety 
figured  above  is  based  upon  the  earnings  of  the  road  from  year  to 
year,  and  that  the  figure  of  60%  for  1906  was  attained  through 
average  freight  rates  50%  higher  than  they  were  in  1899,  and  in  a 
year  of  fabulous  prosperity.  Furthermore  the  earnings  of  the  road 
are  pivoted  on  the  single  industry  of  soft  coal  carriage  and  the  high 
factor  has  therefore  nothing  like  the  same  significance  that  it  would 
have  on  a  road  whose  traffic  was  more  widely  distributed,  or  whose 
earnings  had  risen  less  rapidly  than  those  of  the  Baltimore  and  Ohio. 

Equities  Owned. 

Stocks  and  bonds  in  the  treasury  of  a  par  value  of  about  $64,- 
000,000  are  carried  on  the  company's  books  at  a  valuation  of  $50,- 
721,919.  Of  these  $18,500,000  were  bonds,  of  which  $15,433,954 
were  the  road's  own  securities.  The  treasury  likewise  carries 
$1,098,560  par  value  of  Baltimore  and  Ohio  preferred  and  $40,662, 
of  common.  Of  the  securities  held  by  far  the  largest  item  is  the 
Reading  stock  which  consists  of  $6,065,000  par  value  of  the  first 
preferred,  $14,265,500  of  the  second  preferred,  and  $10,002,500  of 
the  common.  These  stocks  at  1906  market  prices  had  a  market 
value  of  upwards  of  $33,000,000.  In  addition  to  them  the  road  had 
upwards  of  $14,500,000  par  value  of  other  securities,  including  its 
own  stock,  and  $1,154,000  par  value  of  Lehigh.  Both  of  the  latter 
were  worth  much  more  than  par. 

All  the  stocks,  including  the  Reading,  were  carried  on  the  books 
at  $32,149,847.  This  is  obviously  very  much  below  their  market 
value.  Furthermore,  the  company  received  in  dividends  and  in  in- 
terest on  its  securities  owned,  $3,048,663  in  1906.  This  on  a  4% 
basis  would  give  these  securities  a  valuation  of  about  $75,000,000, 
or  $25,000,000  in  excess  of  their  book  value. 

Reference  to  the  analysis  of  the  Reading's  affairs  will  show 
that  this  company  in  1906  was  comfortably  earning  6%  or  7%  on 
its  common  stock  over  and  above  liberal  maintenance  charges,  and 
large  appropriations  for  improvements  and  depreciations.  In  other 
words,  it  might  have  as  legitimately  declared  dividends  to  these 
amounts  as  the  Pennsylvania  or  the  Baltimore  and  Ohio  itself.  All 
of  the  Baltimore  and  Ohio's  equity  in  the  Reading  is  represented  by 


100 


BALTIMORE  &  OHIO 


its  $10,000,000  of  common  stock,  which  is  one- seventh  of  the  total. 
Estimating  that  the  surplus  earnings  of  the  Reading,  after  reason- 
able improvements  and  preferred  dividends,  left  a  surplus  for  the 
common  stock  of  from  $5,000,000  to  $7,000,000,  the  Baltimore  and 
Ohio's  equity  in  the  balance  over  and  above  the  4%  dividend  de- 
clared, amounted  in  1906  to  something  like  $700,000  to  $1,000,000. 
The  purchase  of  these  stocks  was  made  in  1901.  At  that  time 
the  average  price  of  the  first  preferred  was  $75,  of  the  second  pre- 
ferred $50,  and  of  the  common  $40  per  share.  If  the  purchase  price 
were  somewhat  near  these  average  figures  for  1901,  these  Reading 
securities  should  have  cost  the  Baltimore  and  Ohio  from  $15,000,000 
to  $16,000,000,  so  that  their  market  valuation  in  1906  of  upwards  of 
$33,000,000  would  represent  a  profit  to  the  road  of  from  $15,000,000 
to  $17,000,000,  or  more  than  one  hundred  per  cent,  on  the  invest- 
ment. 

Increase  of  Capitalization. 

From  the  table  that  follows  it  will  be  seen  that  the  capitalization 
of  the  road  has  increased  rather  heavily  since  the  consolidation  of 
the  system  in  1900,  the  larger  part  of  this  increase  having  been  com- 
mon stock. 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt 

Total 
Capital 

Gross 
Earnings 

1900 
1906 

§45,000,000 
124,580,000 

$59,357,167 
60,000,000 

$198,435,529 
258,026,846 

1302,792,696 
442,606,846 

$42,117,405 
77,392,056 

Increase  of  6  years:  Total  capital,  46%;  gross  earnings,  83%. 

It  will  be  seen  that  the  funded  debt  has  increased  only  about 
30%  ;  the  preferred  has  remained  stationary ;  while  the  common  has 
risen  from  $45,000,000  to  $124,580,000  in  1906.  With  the  new 
issues  the  amount  of  common  stock  becomes  $152,330,000  for  the 
year  of  1906-7. 

It  is  to  be  noted  that  the  gross  earnings  have  increased  nearly 
twice  as  fast  as  the  increase  in  capitalization,  but  as  already  ex- 
plained this  increase  of  earnings  is  due  largely  to  the  raise  in  the 
average  freight  rates. 

The  larger  part  of  the  road's  expenditures  has  been  for  double 
tracking,  new  equipment,  relaying  track  with  heavier  rails,  and  the 
general  building  up  of  the  road  to  a  "Pennsylvania  standard."  It 
yet  remains  to  be  seen  whether  this  will  prove  as  highly  profitable, 
in  net  profits,  as  had  been  anticipated. 


BALTIMORE  &  OHIO  101 

Character  of  Traffic. 

To  a  greater  extent  than  most  of  the  large  eastern  roads,  though 
not  to  the  same  extent  as  the  Norfolk  and  Western  for  example,  the 
Baltimore  and  Ohio  is  a  freight  road,  and  like  almost  all  of  the  large 
eastern  lines  except  the  New  York  Central,  the  larger  part  of  its 
freight  earnings  is  due  to  the  carriage  of  coal. 

In  1906  products  of  the  farm  made  up  only  7%  of  its  tonnage, 
manufactures  only  17%,  and  products  of  mines,  64%. 

Unlike  most  of  the  other  large  coal  roads,  except  its  two  south- 
erly competitors,  the  Norfolk  and  Western  and  the  Chesapeake  and 
Ohio,  the  Baltimore  and  Ohio's  coal  carriage  was  almost  exclusively 
bituminous  coal.  This  made  up  in  1906  40%  of  its  gross  tonnage, 
while  the  coal  tonnage  of  the  Reading,  for  example,  is  divided  almost 
equally  between  anthracite  and  bituminous.  Baltimore  and  Ohio 
has  next  to  no  anthracite. 

Broadly  speaking,  the  prosperity  of  the  Baltimore  and  Ohio 
therefore  is  pivoted  on  the  soft  coal  industry  and  the  maintenance 
of  soft  coal  rates.  This  is  undoubtedly  an  element  of  weakness,  but 
it  would  be  so  in  a  far  greater  degree  but  for  a  remarkable  fact. 
In  the  fifty  years  preceding  1865,  the  anthracite  coal  production  of 
the  United  States  exceeded  the  bituminous.  In  the  year  named  the 
production  of  the  two  varieties  was  about  equal.  In  the  inter- 
vening forty  years,  anthracite  coal  production  has  risen  from  about 
10,000,000  tons  to  69,000,000  while  bituminous  has  risen  from  the 
same  figure  to  255,000,000.  The  one  has  increased  less  than  seven 
times ;  the  other  has  increased  twenty-five  times.  The  simple  fact 
appears  to  be  that  the  labor  cost  against  the  power  value  of  anthra- 
cite coal  is  notably  higher  than  that  of  bituminous  coal ;  otherwise 
there  could  have  been  no  such  extraordinary  difference  in  their 
development.  It  is  true  that  the  anthracite  fields  are  very  limited, 
while  the  bituminous  coal  fields  are  spread  all  over  the  country  from 
the  Atlantic  to  the  Pacific,  and  it  goes  without  saying  that  the  cost 
of  carriage  from  the  mine  mouth  to  the  point  of  consumption  aver- 
aging for  the  bituminous  coal  a  very  much  shorter  haul,  has  played 
and  will  continue  to  play  a  very  large  role  in  the  relative  use  of  the 
two  coals.  The  rate  of  increase  in  the  anthracite  coal  production 
grows  less  and  less,  decade  by  decade,  while  that  of  bituminous  coal 
tends  to  rise  rather  than  fall. 

Far-sighted  investors  then  will  balance  two  facts :  The  first  that 
even  on  a  pre-eminently  anthracite  line  like  the  Reading,  bituminous 
coal  carriage  is  increasing  much  more  rapidly  than  the  anthracite, 


102 


BALTIMORE  &  OHIO 


and  the  second  that  competition  in  the  bituminous  coal  industry  is 
much  more  widely  distributed  and  therefore  in  times  of  stress  much 
more  subject  to  competitive  reduction  in  price.  So  far  as  the  Balti- 
more and  Ohio  is  concerned,  then,  its  chief  source  of  revenue  is  an 
industry  over  which  it  is  far  more  difficult  for  any  single  road  or  set 
of  roads  to  gain  control,  and  as  the  fields  of  the  West,  Colorado, 
Wyoming,  Washington,  and  other  states  develop,  this  competition 
will  become  keener  rather  than  less. 

On  the  other  hand,  it  is  very  noteworthy  that  in  the  very 
remarkable  year  of  1906,  the  general  tonnage  of  the  road  in- 
creased 17%  while  the  coal  tonnage  increased  only  10%.  Up  to 
1906  it  is  equally  remarkable  that  there  had  been  in  the  previous 
five  years  practically  no  increase  in  the  traffic  density  of  the  road. 
This  will  be  seen  by  reference  to  the  table  of  traffic  density  under 
maintenance. 


Stability  of  Earnings. 

Reference  has  already  been  made  to  the  fact  that  between 
1896  and  1905  the  mileage  of  the  Baltimore  and  Ohio  directly 
operated  had  doubled,  while  its  gross  earnings  trebled.  In  the 
meantime  the  increase  in  gross  earnings  per  mile  was  very  slow. 
In  1901,  earnings  had  reached  only  nearly  $15,000  per  mile,  and 
they  did  not  show  any  notable  increase  until  the  astonishing 
jump  in  1906,  when  they  reached  $19,200  per  mile.  All  this  is' 
set  forth  in  the  following  table : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1895-6 

2,089 

*23, 944,781 

S11.461 

1896-7 

2,031 

25,582,122 

12,644 

1897-8 

2,006 

27,722,788 

13,819 

1898-9 

2,023 

28,404,922 

14,159 

1899-0 

3,181 

42,117,405 

13,236 

1900-1 

3,216 

47,114,430 

14,649 

1901-2 

3,233 

51,178,061 

15,829 

1902-3 

3,935 

63,449,633 

16,124 

1903-4 

3,987- 

65,071,081 

16,320 

1904-5 

4,026 

67,689,997 

16,813 

1905-6 

4,030 

77,392,056 

19,204 

Reference  to  the  column  of  traffic  density  in  the  table  that 
follows  will  show  that  likewise  until  1906,  there  had  been  no 
notable  increase  in  the  ton-miles  per  mile  of  road.  To  restate 
what  has  already  been  clearly  indicated,  the  fine  showing  which 
the  road  has  made  since  its  reorganization  has  been  due  almost 


BALTIMORE  &  OHIO 


10n3 


entirely  to  the  increase  in  rates,  and  these  in  turn  have  been  very 
largely  due  to  increase  in  coal  rates. 

The  paramount  question  which  faces  the  investor  in  Balti- 
more and  Ohio  is  whether  present  rates  can  be  maintained,  and 
especially  coal  rates.  The  increase  in  coal  rates  of  nearly  50% 
has  been  in  the  face  of  a  very  slight  increase  of  freight  rates  all 
over  the  country  at  large,  and  a  very  heavy  decline  in  freight 
rates  on  western  roads.  In  1899,  the  bedrock  year,  the  average 
freight  rate  for  the  whole  of  the  United  States  was  .73c  per  ton 
per  mile;  in  1904  it  was  .78c;  an  increase  of  a  little  over  6%. 
The  total  freight  bill  for  the  whole  of  the  United  States  in  1906 
amounted  to  somewhere  around  a  billion  and  a  half  of  dollars; 
a  general  increase  of  50%  in  rates  would  have  added  to  the 
freight  bill  of  the  country  upwards  of  $700,000,000  per  year. 
In  times  of  prosperity  such  an  increase  as  the  Baltimore  and  Ohio 
has  enjoyed  may  pass  without  protest,  but  it  clearly  seems  pos- 
sible that  if  a  time  of  stress  should  come,  this  amazing  pros- 
perity of  the  railroads  would  not  fail  to  arouse  agitation  for  lower 
rates.  Obviously  the  wisest  thing  which  the  roads  can  do  is  to 
put  their  properties  in  the  best  possible  condition  to  meet  such  a 
change,  and  this  is  what  the  Baltimore  and  Ohio  has  done. 

Maintenance. 

It  will  be  seen  from  the  following  that  with  an  increase  in 
traffic  density  of  only  about  20%,  the  Baltimore  and  Ohio  has 
increased  its  total  maintenance  charges  per  mile  an  even  50%. 
The  items  stand  as  follows : 


Traffic  Density 

Maintenance  per  Mile 

Total 

Year 

Way 

$1,779 
1,939 
1,569 
1,703 
1,950 
2,315 

$1,876 

Equipment 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

2,220,614 
2,318.443 
2,181,518 
2,096,739 
2,218,966 
2,659,949 

2,282,704 

$1,898 
2,077 
2,101 
2,602 
2,717 
3,105 

$2,416 

$3,677 
4,016 
3,670 
4,305 
4,667 
5,420 

Average 

$4,292 

Miles  of  extra  main  track,  1,182. 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

Pennsylvania . 
C.  &  Ohio    ... 
Norfolk  &  W. 

3,862,125 
2,057,510 
2,190,314 
2,764,827 

$3,648 
1,387 
1,563 
1,861 

$4,983 
1,995 
1,903 
3,216 

$8,631 
3,382 
3,466 
5,077 

104  BALTIMORE  &  OHIO 

Undoubtedly  the  charges  on  the  Baltimore  and  Ohio,  espec- 
ially in  1905-6,  were  heavy.  Yet  when  they  are  compared,  for 
example,  with  those  of  the  Pennsylvania,  it  will  be  noted  that  the 
Pennsylvania's  average  maintenance  charges  for  a  period  of  six 
years  have  been  more  than  twice  those  of  the  Baltimore  and 
Ohio  on  a  traffic  density  only  75%  greater.  Compared  with  the 
Erie,  maintenances  have  been  about  even ;  compared  with  the 
Chesapeake  and  Ohio  and  with  the  Norfolk  and  Western,  Balti- 
more and  Ohio's  charges  have  been  considerably  higher ;  that  is 
to  say  from  $500  to  $600  per  mile  more,  traffic  density  considered. 

Yet  another  noteworthy  fact  is  that  with  a  much  lower  per- 
centage of  double  track,  both  the  Norfolk  and  Western  and  the 
Chesapeake  and  Ohio  have  been  able  to  handle  very  nearly  the 
same  amount  of  traffic  per  mile.  The  enormous  outlay  which 
the  road  has  made  for  double-tracking,  heavier  rails  and  the 
like,  has  undoubtedly  put  it  in  a  better  position  for  future  traffic, 
but  the  traffic  density  of  the  Norfolk  and  Western,  with  only  185 
miles  of  double  track,  was  actually  higher  than  that  of  the  Balti- 
more and  Ohio  in  1906.  Its  rate  of  increase  was  more  rapid  than 
the  latter,  which  had  nearly  1,200  miles  of  double  track.  There 
is  here  the  eternally  recurrent  problem  as  to  where  a  double  track 
becomes  profitable. 

Meanwhile  it  seems  to  be  clear  that  the  maintenance  of  the 
Baltimore  and  Ohio  has  been  ample,  and  that  it  is  in  an  admir- 
able position  for  a  large  increase  of  business,  should  this  business 
come. 

Improvements. 

In  addition  to  enormous  capital  expenditures,  the  Baltimore 
and  Ohio  has  systematically  set  aside  since  its  reorganization 
very  large  sums  for  the  same  purpose  from  its  surplus  earnings. 
These  for  a  series  of  years  have  been  as  follows : 

1899-0 §2,540,230 

1900-1 2,740,932 

1901-2 2,765,194 

1902-3 4,073,000  " 

1903-4 2,408,650 

1904-5 2,979,454 

1,500,000     (Depreciation  of  Equipment) 
1905-6 1,500,000 

4,066,038 

Total 824,573,498 


BALTIMORE  &  OHIO  105 

This  amount  is  undoubtedly  large,  amounting  to  an  average 
expenditure  of  over  $6,000  for  every  mile  of  road.  It  is  of 
course  nothing  like  the  $58,447,000  set  aside  by  the  Pennsyl- 
vania, but  the  Pennsylvania's  earnings  and  profits  were  enor- 
mously greater.  It  is  nothing  like  the  $25,271,000  similarly  ap- 
propriated by  the  Lackawanna  on  less  than  a  thousand  miles  of 
road,  but  it  compares  very  favorably  with  the  $10,027,000  set  aside 
by  the  Reading;  the  $10,794,000  set  aside  by  the  Erie;  and  the 
$5,713,000  set  aside  by  the  Lehigh  Valley.  It  is  quite  certain  that 
the  Baltimore  and  Ohio  has  been  abreast  of  the  foremost  roads 
which  have  turned  back  a  large  part  of  their  earnings  into 
improvements. 

Surplus  Earnings. 

In  analysing  the  following  table  of  surplus  shown,  it  will  be 
seen  that  a  very  large  part  of  the  83%  increase  in  surplus  earn- 
ings, has  been  absorbed  by  the  increase  in  capitalization;  that  is 
to  say,  to  1906,  the  surplus  shown  averaged  around  11%-  This 
may  be  stated  in  quite  another  way  much  more  favorable  to  the 
road.  This  is  that  while  the  Baltimore  and  Ohio  has  been  carry- 
ing out  improvements  on  a  huge  scale,  and  increasing  its  capital- 
ization by  nearly  50%,  it  has  still  been  able  to  increase  its  surplus 
at  practically  the  same  rate,  and  show  about  the  same  amount 
from  year  to  year  earned  on  the  common  stock. 

The  increase  in  the  year  1906  is  especially  noteworthy,  but  a 
reference  to  the  increase  of  earnings  for  the  same  period  will 
show  that  this  high  percentage  has  not  been  attained  through 
mere  bookkeeping,  but  in  the  face  of  a  heavy  increase  of  mainte- 
nance charges.  It  is  to  be  noted  that  the  surplus  here  shown  for 
1906  over  previous  years  is  slightly  in  excess  of  the  net  income 
shown  by  the  reports,  which  have  deducted  from  a  half  a 
million  to  a  million  dollars  annually  of  "Miscellaneous  Improve- 
ments" which  were  included  among  Fixed  Charges.  These 
amounts  have  been  added  to  the  net  income  shown  in  the  reports 
in  each  instance,  and  therefore  slightly  increase  the  nominal  per- 
centage shown  as  available  for  improvements  and  common  stock 
dividend. 


106 


BALTIMORE  &  OHIO 


Dividend 

Per  Cent. 

Dividend 

Average 

Year 

Surplus 

paid  on 

Earned  on 

paid  on 

Preferred 

Common 

Common 

1900-1 

$  7,637,613 

4 

11.6 

4 

99 

1901-2 

10,324,883 

4 

10.4 

4 

105 

1902-3 

14,905,133 

4 

10. 

4 

85 

1903-4 

12,766,010 

4 

8.3 

4 

85 

1904-5 

14,153,248 

4 

11. 

AYz 

110 

1905-6               19,130,337 

4 

15.4 

5/z 

112 

Averaging  the  percentages  shown,  it  will  be  seen  that  the 
surplus  nominally  available  for  the  common  stock  dividend  has 
amounted  to  11%  per  annum  for  the  six  years.  This  is  slightly 
better,  for  example,  than  the  Pennsylvania  and  the  increase  of  the 
dividend  on  the  common  stock  to  a  six  per  cent  basis  in  1906 
obviously  had  ample  justification. 

Dividend  Record. 

In  the  old  Garrett  days  Baltimore  and  Ohio  dividends  were 
considered  almost  as  solid  as  those  of  the  New  York  Central  or 
Pennsylvania.  For  six  consecutive  years  from  1881  the  road 
paid  10%,  but  in  the  demoralization  that  followed  the  death  of 
the  elder  Garrett,  earnings  steadily  dwindled  until  they  disappeared 
entirely.  It  will  be  seen  that  since  the  reorganization,  dividends 
on  the  common  have  been  steadily  increased,  in  1906  the  stock 
being  placed  on  a  6%  basis.  The  record  for  thirty  years  is  as 
follows : 


Year 

Common 

Preferred 

1877 

8 

1878 

8  (stock) 

1879 

4  and  4(i  stock 

1880 

9 

1881-5 

10 

1886 

8 

1887 

4 

1888-90 

1891 

20  stock 

1892 

3% 

1893 

5 

1894 

4% 

1895-99 

Reorganization 

1900 

2 

4 

1901-4 

4 

4 

1905 

Ay2 

4 

1906 

W 

4 

BALTIMORE  &  OHIO  107 

The  Balance  Sheet. 

Deducting  from  the  current  assets  the  amounts  advanced  to 
other  companies,  as  is  customary,  and  excluding  the  item  of  ma- 
terials on  hand,  the  balance  sheet  at  the  close  of  the  fiscal  year  of  1906 

showed  current  assets $23,899,696 

and   current  liabilities ■.   22,675,257 

leaving  a  working  balance  of $1,224,439 

In  addition  to  the  above  assets,  there  was  due  from  the  Balti- 
more and  Ohio  Equipment  Company,  $13,900,408,  and  from  other, 
probably  subsidiary  companies,  $10,391,230. 

Of  the  current  assets  the  item  of  cash  represented  $8,890,830. 

The  balance  to  the  credit  of  Profit  and  Loss  was  $15,823,643, 

as  against  $9,135,287  for  the  previous  year.     In  other  words,  after 

all  deductions  for  interest,  dividends,  etc.,  the  road  carried  to  this 

account  a  credit  of  $6,688,355  of  undistributed  net  surplus. 

Investment  Value. 

It  is  certainly  a  very  remarkable  showing  that  the  Baltimore 
and  Ohio  has  made  since  its  reorganization.  In  the  third  year  after 
it  was  taken  from  the  receivers'  hands  it  was  showing  more  than 
11%  net  surplus  for  its  common  stock,  and  that  showing  has  been 
averaged  in  the  five  succeeding  years.  With  this  showing,  with 
the  consolidation  of  the  southern  coal  roads  under  practically  one 
ownership,  and  with  the  powerful  backing  of  the  Pennsylvania,  and 
the  fine  management  which  characterizes  all  of  the  company's  under- 
takings, the  B.  &  O.  stock  in  general  should  have  shown  more  or 
less  corresponding  quotations. 

The  preferred  stock  is  limited  to  4%  non-cumulative  dividends. 
These  have  been  paid  since  1900,  the  year  after  the  reorganization, 
and  since  this  time  the  stock  has  ranged  between  $83  per  share  and 
par.  In  1906,  under  the  prevailing  high  rates  of  interest,  its  range 
was  between  $92  and  $99  per  share.  With  a  margin  of  safety  for 
the  funded  securities  of  about  60%,  such  as  that  shown  in  1906, 
and  with  the  amount  of  preferred  stock  less  than  half  the  common, 
the  preferred  is  entitled  to  be  regarded  as  a  solid  stock  whose 
security  is  likely  to  increase  rather  than  diminish.  Its  price,  there- 
fore, will  be  determined  by  the  average  savings  bank  rate  for  money, 
with  the  further  possibility  that  it  might  be  desired  for  the  purposes 
of  control. 

In  1900,  Baltimore  and  Ohio  common,  on  a  2%  basis,  sold  as 
high  as  $90  per  share,  and  on  the  doubling  of  the  dividend  in  the 


108  BALTIMORE  &  OHIO 

following  year,  sold  up  to  $118  per  share  in  the  boom  of  1902.  In 
the  slump  of  1903-4,  it  sold  down  as  low  as  $72  per  share,  rising 
again  to  $117  in  1905,  and  with  the  placing  of  the  stock  on  a  6% 
basis  in  1906,  it  touched  $125.  In  the  same  year  the  Pennsylvania 
on  a  6%  basis  and  the  New  York  Central  on  a  5%  basis,  were 
habitually  selling  twenty  to  twenty-five  points  higher,  and  the  Read- 
ing on  a  4%  basis  even  more.  Yet  with  ample  maintenance  charges 
the  surplus  shown  for  B.  &  O.  common  was  very  considerably  in 
excess  of  that  shown  for  the  Pennsylvania.  It  was  more  than  twice 
that  shown  for  the  New  York  Central  and  more  than  the  percentage 
shown  for  the  Reading.  It  is  not  very  easy  to  explain  the  anomaly 
and  there  are  undoubtedly  many  who  purchased  the  stock  in  the 
belief  that  this  obvious  discrepancy  would  be  reduced.  The  fact  can 
be  due  only  to  the  caution  engendered  by  the  sources  of  the  Balti- 
more and  Ohio's  unquestioned  prosperity.  The  mileage  earnings 
of  other  roads  have  increased  very  much  more  rapidly  than  have 
those  of  the  B.  and  O.  and  on  a  far  broader  and  firmer  basis  of 
traffic.  The  Reading,  the  Pennsylvania  and  all  of  the  eastern  roads 
have  likewise  been  benefited  to  a  considerable  degree  by  an  increase 
in  freight  rates,  but  in  nothing  like  the  same  degree  as  the  B.  and  O. 
These  other  roads  could  go  back  to  the  rates  of  1899  and  not  be 
seriously  crippled.  The  B.  and  O.  could  not.  It  could  not  reduce 
its  gross  earnings  of  1906  by  $18,000,000,  and  at  the  same  time  scale 
its  operating  charges  sufficiently  to  leave  any  considerable  profit  to 
the  shareholders.  It  is  not  probable,  for  example,  that  its  mainte- 
nance charges  for  1906  could  be  scaled  a  full  $1,500  per  mile  with- 
out impairing  the  condition  of  the  road,  and  this  on  its  4,000  miles 
of  track  would  amount  to  only  $6,000,000.  It  is  evident  that  in- 
vestors have  not  lost  sight  of  the  fact  that  B.  and  O.  prosperity  is 
conditioned  in  and  has  been  brought  about  by  an  increase  of  freight 
rates.  If  these  rates  can  be  maintained  there  seems  no  reason  why 
its  stock  should  not  steadily  pay  a  six  per  cent,  dividend,  even  if 
some  setback  in  business  should  come.  It  seems  to  be  fairly  evident 
that  experienced  railroad  managers  like  Air.  Harriman  and  his 
partners  would  not  buy  a  huge  block  of  the  stock  of  the  road  unless 
they  regarded  it  as  full  of  possibilities,  at  least  to  them,  and  the 
stock  well  worth  its  market  price.  In  justice  to  its  shareholders  the 
Pennsylvania  could  not  have  sold  this  stock  at  much  below  the 
market  price,  and  if  the  interests  which  have  made  so  magnificent 
a  success  of  the  Union  Pacific  did  not  regard  this  valuation  as  ex- 
cessive, it  is  not  very  reasonable  that  the  investor  should  have 
greater  fears. 


BALTIMORE  &  OHIO  109 

On  a  six  per  cent,  basis,  with  money  at  4%,  a  solid  6%  stock 
is  entitled  to  sell  around  $150  per  share;  but  by  reason  of  the  nar- 
row basis  of  its  prosperity,  it  is  probable  that  the  Baltimore  and 
Ohio  will  tend  to  sell  rather  under  other  6%  stocks  actually  showing 
less  favorable  surpluses  than  the  B.  and  O.  That  is  to  say,  the  stock 
presents  a  greater  risk.  The  investor  will  ask  a  higher  yield  of 
interest  than  on  stocks  which  he  regards  as  on  a  more  solid  foun- 
dation. On  the  other  hand,  should  the  Baltimore  and  Ohio  come 
wholly  under  Harriman  interests,  and  become  the  eastern  outlet  of 
the  Harriman-Union-Southern  Pacific  system,  its  traffic  and  its 
earnings  might  acquire  a  much  higher  degree  of  solidity  with  ex- 
cellent guarantees  as  to  management  and  results. 

In  the  very  moderate  decline  of  1906,  with  every  prospect  of 
an  increase  of  dividend,  the  stock  sold  at  $105  per  share;  in  the 
heavier  recession  of  March,  1907,  it  sold  at  $90.  Were  the 
investor  able  to  secure  it  at  anything  like  these  figures,  he  should 
reflect  that  the  surplus  shown  might  at  a  pinch  be  cut  nearly  in 
halves  without  threatening  his  dividend,  and  that  with  the  return 
of  more  favorable  conditions  the  stock  might  readily  sell  at  from 
$120  to  $140  per  share,  and  even  higher  in  a  market  boom.  There 
are  not  lacking  casuists  to  maintain  that  a  previous  record  of  bad 
management  offers  the  highest  sort  of  possibilities  for  an  investor, 
and  if  this  be  true  it  would  be  difficult  to  cite  a  more  promising 
speculative  stock  than  Baltimore  &  Ohio. 


BOSTON    AND   MAINE  RAILROAD. 

The  Boston  and  Maine,  which  in  1907  was  practically  absorbed 
by  the  New  Haven,  was  the  most  important  railway  system  in  New 
England  outside  the  New  Haven  road.  In  1906  it  operated  directly 
2,287  miles,  against  2,062  for  the  New  Haven,  and  through  its  stock 
ownership  in  the  Maine  Central  controlled  816  miles  more,  carrying 
the  total  to  well  over  three  thousand  miles.  The  Maine  Central  is 
operated  separately,  though  under  practically  the  same  manage- 
ment. 

The  present  Boston  and  Maine  represents  the  consolidation  in 
1890  of  the  Boston  and  Maine,  the  Eastern,  and  the  Portsmouth, 
Great  Falls  and  Conway  Railroads,  but  prior  to  this  the  road  had 
acquired  control,  by  lease,  of  the  old  Boston  and  Lowell,  the  Con- 
cord and  Montreal  and  several  smaller  lines.  In  1900  the  road 
began  to  operate,  under  a  99  years  lease,  the  Fitchburg  and  leased 
lines,  aggregating  457  miles  of  road,  and  in  1901  the  company  pur- 
chased the  capital  stock  of  the  Central  Massachusetts  R.  R. 

By  the  consolidation  with  the  New  Haven,  practically  the  whole 
transportation  system  of  New  England,  outside  of  the  New  York 
Central's  Boston  &  Albany  line,  came  under  a  single  management. 
The  New  Haven's  relations  with  the  New  York  Central  are  har- 
monious, and  New  England  is  not  troubled  with  rate  wars. 

The  Boston  and  Maine  lies  mainly  in  Massachusetts  and  New 
Hampshire,  about  one-half  of  it  being  in  the  latter  state;  511  miles 
or  nearly  25%  of  the  line  is  double  tracked.  The  road  operates 
through  a  territory  that  is  at  about  a  standstill  as  far  as  develop- 
ment goes ;  but  through  the  growth  of  the  cities  its  traffic  rises 
steadily. 

Ownership. 

The  Boston  and  Maine  is  one  of  the  most  widely  held  roads  in 
the  Union,  reporting  in  1905  7,402  shareholders.  This  is  a  little 
over  -10  shares  per  shareholder,  representing  an  average  investment 
of  about  $6,500. 

The  directorate  of  1906  included  Lucius  Tuttle,  president; 
Richard  Olney,  ex-Secretary  of  State  ;  Henry  M.  Whitney,  a  very 
large  New  England  capitalist;  and  Alexander  Cochrane,  Boston; 

(110) 


BOSTON  &  MAINE  111 

Samuel  C.  Lawrence,  Medford ;  Joseph  H.  White,  Brookline,  Mass. ; 
Lewis  Cass  Ledyard,  Henry  F.  Dimock,  and  Charles  M.  Pratt,  (of 
the  Standard  Oil  Company),  New  York;  Alvah  W.  Sulloway, 
Franklin,  N.  H. ;  Walter  Hunnewell,  Wellesley,  Mass.;  and  Wil- 
liam Whiting,  Holyoke,  Mass. 

These  are  practically  all  New  England  capitalists,  indicating 
the  local  ownership  of  the  road. 

Capitalization. 

The  nominal  capitalization  of  the  Boston  and  Maine  is  low, 
amounting  in  1906  to  only  $59,000,000,  or  an  average  of  about 
$26,000  per  operated  mile.  In  point  of  fact  the  system  is  largely 
made  up  of  leased  lines  and  its  rental  payments  on  these  amounted 
in  1906  to  $5,075,000,  almost  four  times  the  interest  on  its  nominal 
funded  debt.  When  these  rentals  are  capitalized  at  4%,  following 
the  custom  of  this  book,  the  capital  account,  for  1906,  was  as 
follows : 

Common   stock $24,638,070 

Preferred  stock 3,149,800 

Total  stock $27,787,870 

Bonded   debt 31,305,543 

Nominal    capital $59,093,413 

Rentals  cap.  at  4% 126,862,500 

Approximate  gross  capitalization.  .  .  .$185,955,913 
Securities  held 10,535,094 

Approx.  net  capitalization $175,420,819 

Est.  net  capital  per  mile $77,660 

Average  miles  operated 2,287 

Net  earnings  on  net  capitalization.  .  5.6% 

Stock  on  net  capitalization 16% 

Fixed  Charges  on  Total  Net  Income  78% 

Factor  of  Safety 22% 

The  Boston  and  Maine  itemizes  the  stocks  and  bonds  of  its 
leased  lines,  and  these  amount  to  $60,000,000  of  stocks  and  $46,- 
000,000  of  bonds.  When  these  two  items  have  been  added  to  the 
nominal  capitalization  of  the  Boston  and  Maine  proper,  the  actual 


112  BOSTON  &  MAINE 

amount  rises  to  over  $165,000,000,  which  sum  compares  with  the 
$185,000,000  here  estimated  as  the  gross  capitalization  of  the  road. 

The  securities  owned  are  apparently  carried  at  practically  the 
par  value  of  the  stocks  and  bonds,  including  several  items,  in  par- 
ticular the  24,000  shares  of  the  Maine  Central  stock,  which  are 
worth  far  in  excess  of  this  valuation.  The  total,  however,  is  small, 
and  does  not  greatly  affect  the  estimate  here  made.  This  estimate 
shows  a  net  capitalization  of  $77,660  per  mile  operated.  This  com- 
pares with  $103,741  for  the  New  Haven,  which  latter,  however, 
shows  gross  earnings  more  than  half  again  as  large  as  the  Boston 
and  Maine. 

Compared  with  the  Net  Earnings,  the  Boston  and  Maine's  capi- 
talization is  rather  high,  its  figure  of  5.6%  of  net  earnings  on  net 
capitalization  comparing  with  8.2%  for  the  New  Haven ;  and  8.4% 
for  the  subsidiary  Maine  Central. 

The  percentage  of  Fixed  Charges  on  Total  Net  Income  is  very 
high,  the  Fixed  Charges  consuming  78%.  Over  60%  of  this  item 
is  represented  by  rentals  paid.  The  leases  mainly  take  the  form  of 
fixed  dividends  on  the  stocks  of  the  leased  roads  and  a  guarantee  of 
their  securities.  Were  the  Boston  and  Maine  other  than  a  solid, 
even-running  road,  its  Factor  of  Safety  for  its  own  securities,  and 
on  its  guarantees  of  leased  roads  would  be  very  low.  As  a  matter 
of  fact,  the  road  has  been  able  steadily  to  meet  its  obligations  with- 
out embarrassment,  and  it  is  obvious  that  its  securities  as  well  as  its 
stock  are  highly  prized  by  New  England  investors. 

Equities  Owned. 

The  chief  item  of  treasury  holding  is  54,547  shares  of  the  com- 
mon stock  of  the  Fitchburg  road.  The  guarantee  on  this  stock  is 
only  one  per  cent. 

The  holdings  of  par  value  of  $2,516,000  of  the  Maine  Central 
represents  on  the  average  price  of  this  stock  in  recent  years,  nearly 
double  this  sum. 

The  only  other  important  holding  was  $1,293,559  par  value  of 
the  Boston  and  Maine's  own  stock,  worth  above  $160  per  share. 

The  various  stocks  and  bonds  held  by  the  Boston  and  Maine 
yield  a  revenue  of  only  $255,000  per  year,  which  on  a  4%  basis 
would  not  greatly  raise  the  valuation  at  which  they  are  carried  on 
the  company's  books. 


BOSTON  &  MAINE  113 

Increase  of  Capitalization. 

In  the  five  years  from  1901  the  increase  of  capitalization  has 
been  very  slight,  amounting  at  the  close  of  the  fiscal  year  of  1906 
to  only  a  little  over  $4,000,000.  The  total  increase  in  the  amount  of 
the  dividends,  disbursements  and  Fixed  Charges  has  only  been 
$454,224.  Within  the  same  period  its  gross  earnings  have  in- 
creased $8,460,000  and  practically  all  of  this  increase  of  income  has 
been  turned  back  into  the  road.  During  1906  the  company  refunded 
over  $10,000,000  of  its  obligations,  resulting  in  a  saving  of  $267,000 
per  annum. 

During  1906  the  company  offered  for  sale  $4,203,000  par  value 
of  new  stock,  together  with  the  amount  of  stock  in  its  treasury.  At 
the  date  of  the  annual  report  for  1906,  $3,627,000  par  value  of  these 
shares  had  been  sold. 

The  balance  is  required  by  law  to  be  disposed  of  by  public 
auction.  The  price  fixed  by  the  Railway  Commissioners  of  Massa- 
chusetts, Maine  and  New  Hampshire  was  $165  per  share.  The  in- 
crease of  dividend  charge  through  this  new  stock  will  be  more  than 
offset  by  the  saving  in  Fixed  Charges  referred  to. 

The  premiums  received  through  a  series  of  years  upon  all  the 
stocks  of  the  Boston  and  Maine  outstanding,  including  the  1906 
issue,  has  produced  for  its  treasury  a  total  of  $39,289,000,  an  excess 
over  its  nominal  capitalization  of  nearly  $14,000,000,  the  average 
price  of  the  stock  being  $152  per  share.  This  is  another  evidence  of 
the  fact  that  the  capitalization  of  a  railroad  is  more  or  less  a  matter 
of  bookkeeping  and  if  the  matter  of  premiums  had  been  included  in 
the  estimate  of  capitalization  above,  the  gross  amount  shown  would 
have  been  increased  by  about  the  $14,000,000  noted. 

Under  the  laws  of  Massachusetts,  Maine  and  New  Hampshire, 
the  price  at  which  new  stock  is  issued  is  fixed  by  the  railway  com- 
missions of  these  states  and  is  supposed  to  represent  a  near  estimate 
of  the  actual  value  of  the  stock,  so  that  the  value  of  the  "rights"  on 
this  new  stock  was  very  small. 

Character  of  Traffic. 

The  passenger  business  of  the  Boston  and  Maine  amounts  to 
$15,000,000,  or  about  37%  of  the  gross  earnings  from  operation. 
The  freight  traffic  is  widely  distributed,  the  business  of  the  road 
being  very  general.  The  main  item  is  coal,  which,  however,  forms 
only  about  25%  of  the  total  tonnage,  and  the  next  largest  item, 
lumber,  represents  only  about  12%. 

8 


114 


BOSTON  &  MAINE 


Stability  of  Earnings. 
Since  the  addition  of  the  Fitchburg  R.  R.  by  lease,  the  mileage 
of  the  system  has  increased  but  slightly,  while  the  gross  earnings 
have  increased  more  than  35%.  Over  a  period  of  ten  years  the 
average  earnings  per  mile  have  increased  from  $11,383  to  $17,147, 
an  increase  of  55%.    This  is  shown  in  detail  in  the  following  table: 


Year 

Miles  Operated 

Gross  Earnings 

Earnings  per  Mile 

1896-7 

1,718 

$19,556,687 

$11,383 

1897-8 

1,715 

19,742,945 

11,506 

1898-9 

1,715 

19,890,607 

11,598 

1899-0 

1,752 

22,148,602 

12,641 

1900-1 

2,257 

30,406,907 

13,472 

1901-2 

2,265 

31,606,322 

13,954 

1902-3 

2,280 

33,537,491 

14,709 

1903-4 

2,285 

34,705,230 

15,188 

1904-5 

2,288 

36,017,074 

15,741 

1905-6 

2.287 

39,214,202 

17,147 

It  will  be  seen  that  this  increase  is  very  steady  and  is  marked 
by  no  setback  from  one  year  to  another.  It  is  this  evenness  of  earn- 
ings which  gives  to  the  Boston  and  Maine  its  solidity. 

Maintenance. 

It  will  be  seen  from  the  following  table  that  the  traffic  density 
of  the  road  has  increased  about  30%,  and  the  total  expenditures  for 
maintenance  per  mile  35%.  This  is  nothing  like  the  usual  showing 
for  American  roads  within  this  period  and  it  is  evident  that  the 
maintenance  charges  have  been  very  carefully  adjusted  with  an  eye 
to  maintaining  the  road's  7%  dividends.  In  comparison  with  the 
New  Haven,  with  about  an  equal  freight  traffic  density  and  about 
the  same  percentage  of  second  track,  the  Boston  and  Maine's  charges 
are  low,  but  it  should  be  remembered  that  the  average  earnings  of 
the  New  Haven  road,  per  mile,  are  more  than  50%  higher  than  the 
Boston  and  Maine. 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

686,006 
715,391 
757,030 
756,421 
810,371 
879,992 

$1,513 
1,760 
1,609 
1,676 
1,967 
2,353 

$1,813 

$1,438 
1,477 
1,394 
1,595 
1,838 
1,460 

$1,533 

$2,951 
3,237 
3,003 
3,271 
3,805 
3,813 

Average 

767,535 

$3,346 

Miles  of  extra  main  track,  521. 


BOSTON  &  MAINE 


115 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

$2,786 
2,741 

Equipment 

$2,408 
3,169 

New  Haven .... 
N.  Y    C 

787,816 
2,096,289 

$5,194 
5,910 

There  has  been  a  lively  complaint  that  the  road  has  not  followed 
a  policy  of  improvement  and  betterment  in  keeping  with  the  rest  of 
the  roads  of  the  country,  and  in  1906  the  character  of  the  Boston 
and  Maine  service  in  New  Hampshire  was  the  dominant  politic  il 
question  in  that  state.  The  policy  of  the  road  is  undoubtedly  ex- 
tremely conservative,  and  the  need  of  an  improved  service  has  been 
recognized  by  the  road  in  the  sale  of  additional  stock  for  providing 
funds  for  betterments. 

Improvements. 

The  report  states  that  the  following  amounts  have  been  included 
in  the  operating  expenses,  appropriated  under  separate  headings  for 
new  equipment: 

1901-2   $563,239 

1902-3   170,370 

1903-4   350,988 

1904-5   807,782 

1905-6   1,026,427 


Total $2,918,806 

The  total  expenditures  for  new  equipment  for  1906  amounted 
to  $2,455,000,  the  balance  having  been  charged  to  capital  account. 
Much  heavier  appropriations  than  this  were  needed  in  1907. 

Surplus  Earnings. 

In  the  six  years  from  1901-06  the  surplus  shown  has  not  greatly 
increased,  it  being  evident  that  the  operating  expenses  were  adjusted 
to  meet  the  regular  dividends.  The  following  table  shows  the  con- 
ditions for  the  six  years  under  view : 


Year 

Surplus 

Dividendson 

Preferred 

Stock 

Per  Cent. 

Earned  on 

Common 

Dividends 
Paid  on 
Common 

Av'age  price 

(Calendar 

Year) 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

$1,690,413 
1,786,726 
1,793,908 
1,849,456 
1,883,572 
2,051,919 

6 
6 
6 
6 
6 
•  6 

6.4 
6.7 
6.6 
6.9 
6.8 
7.9 

7 
7 
7 
7 
7 
7 

194 
199 
178 
166 
178 
175 

116  BOSTON  &  MAINE 

The  discrepancy  between  the  percentage  on  common  stock 
earned  and  the  dividend  paid  is  explained  by  the  fact  that  the  com- 
pany holds  11,282  of  its  own  shares,  upon  which  no  dividends  were 
paid.    This  left  a  small  surplus  each  year. 

Dividend  Record. 

In  twenty-six  years,  the  full  6%  has  been  paid  on  the  preferred 
stock,  and  the  following  on  the  common : 

% 

1881-5   8 

1886 9]/2 

1887 10 

1888-9   9 

1890 9y2 

1891  9 

1892-3   8 

1894-99   6 

1900-6   7 

It  will  be  seen  that  the  stock  reached  its  maximum  earning 
power  in  1887  when  10%  was  paid.  It  then  dropped  down  to  6%, 
increasing  to  7%  in  1900.     Since  that  time  at  the  same  rate  to  date. 

The  Balance  Sheet. 

Excluding  materials  and  supplies  on  hand,  the  balance  sheet  for 
June  30th,  1906,  showed:  Current  cash  assets,  $9,571,535;  current 
liabilities,  $8,931,260;  leaving  a  working  balance  of  $640,275. 

In  addition  to  the  above,  there  were  sundry  assets  of  $1,654,139 
and  accrued  liabilities,  etc.,  of  $5,516,033.  The  item  of  cash  was 
$2,964,216,  and  the  credit  to  Profit  and  Loss  was  $2,591,590. 

The  most  considerable  item  of  the  current  liabilities  was  notes 
payable  of  $3,450,000.  The  report  states  that  this  indebtedness  was 
for  new  equipment  expenditures  in  anticipation  of  the  sale  of  new 
common  stock  for  this  purpose.  At  the  date  of  the  report,  September 
6th,  19C6,  $1,850,000  of  this  indebtedness  was  discharged,  the  re- 
mainder to  be  disposed  of  as  the  obligations  given  therefor  mature. 

Investment  Value. 

It  will  be  seen  from  the  table  of  average  prices,  that  the  quota- 
tions have  considerably  declined  from  the  levels  of  1901  to  1903. 
Within  the  six  years  under  view  the  stock  reached  its  highest  quota- 
tion in  April,  1902,  when  it  stood  at  $209  per  share.  It  declined 
from  this  figure  in  the  slump  of  1903-4  to  $158,  and  has  not  since 


BOSTON  &  MAINE  117 

been  above  $185.  Tins  has  been  in  the  face  of  a  steady  increase  of 
earnings,  of  maintenance  and  of  surplus.  This  may  have  been  due 
in  part  to  the  political  agitation  against  the  road,  but  the  chief  cause 
undoubtedly  was  the  demand  for  a  higher  return  for  the  investment. 
At  $200  per  share  the  stock  yielded  only  3*/^%  on  its  investment. 
With  savings  bank  money  at  4%  and  no  large  prospects  for  an  in- 
crease of  dividends,  it  was  natural  that  the  stock  should  go  to  a 
lower  level.  The  fact  that  it  could  sell  at  an  average  price  of  $175 
under  the  prevailing  high  money  rates  of  1906  is  evidence  that  there 
has  been  no  loss  of  confidence  in  the  stock.  At  this  price  Boston  and 
Maine  simply  represents  a  highly  conservative  and  favorite  invest- 
ment. The  management  is  known  to  the  people  of  New  England 
and  the  property  is  at  their  very  doors. 

There  seems  little  indication  now  that  the  dividend  rate  will  be 
increased  within  the  near  future.  The  maintenance  charges  may 
have  seemed  to  the  management  adequate,  but  if  the  service  of  the 
road  has  failed  to  satisfy  its  patrons,  it  would  be  very  dubious  policy 
to  increase  the  dividends  in  the  face  of  this  dissatisfaction.  If  high 
rates  for  money  should  continue,  with  a  larger  yield  on  standard 
stocks,  and  a  larger  chance  for  gain,  it  seems  probable  that  the  pre- 
vailing price  of  Boston  and  Maine  would  tend  to  decline  rather  than 
rise.  The  laws  of  the  states  through  which  it  runs  being  as  they  are, 
the  return  to  the  shareholders  is  limited  to  the  pure  dividend ;  they 
receive  no  handsome  plums  in  the  way  of  "rights"  and  a  40%  rise  in 
the  price  of  living  since  1896  has  affected  people  with  fixed  incomes 
very  deeply.  The  very  natural  demand  has  been  for  a  higher  interest 
return.  Holders  of  the  stock  who  let  go  of  it  above  $175  would 
probably  be  able  to  buy  it  back  at  a  lower  figure  or  to  find  more 
attractive  investments  elsewhere. 

The  amount  of  the  preferred  stock  is  small.  It  is  limited  to  6% 
and  its  value  is  fixed  simply  by  the  prevailing  price  of  money.  On 
a  4%  basis  it  is  worth  about  $150  per  share  at  the  outside. 


BUFFALO,  ROCHESTER   AND   PITTSBURGH 

RAILWAY. 

The  Buffalo,  Rochester  and  Pittsburgh  is  one  of  the  few 
small  railways  operating  in  trunk  line  territory.  It  is  essentially 
a  "coaler,"  and  its  line  leads  from  the  bituminous  coal  regions 
eastward  of  Pittsburg  to  Buffalo  on  Lake  Erie,  and  to  Rochester 
on  Lake  Ontario.  It  is  managed  in  a  solid  business  way,  and  with 
the  improvement  of  conditions  in  the  bituminous  coal  industry, 
its  has  become  exceedingly  prosperous. 

History. 

The  road  represents  the  consolidation,  in  1887,  of  the  Buffalo, 
Rochester  and  Pittsburgh  and  the  Pittsburgh  and  State  Line  com- 
panies. In  1898  the  Alleghany  and  Western  was  leased,  and  this 
and  minor  leases  bring  the  total  operated  length  of  road  up  to  568 
miles. 

The  road  is  located  to  form  a  natural  highway  from  Pitts- 
burgh and  the  coalfields  to  the  lakes,  and  its  chief  business  is  low 
grade  freight  transportation.  It  obtains  entrance  into  Buffalo 
and  Pittsburgh  by  traffic  arrangements  with  other  roads. 

Ownership. 

The  road  is  controlled  by  the  Iselin  interests  and  others  con- 
nected with  the  Gallatin  National  Bank  of  New  York.  The  direc- 
torate includes  Adrian  Iselin,  Jr.,  identified  with  coal  interests  in 
the  region ;  C.  O'Donnel  Iselin,  William  E.  Iselin,  and  Ernest 
Iselin ;  Samuel  Woolverton,  president  of  the  Gallatin  National 
Bank ;  Henry  G.  Barbey,  Walter  G.  Oakman,  also  a  director  of 
the  Long  Island,  Louisville  and  Nashville  and  other  roads ;  W. 
Emlen  Roosevelt,  also  a  director  in  the  Nickel  Plate  and  the 
Mobile  and  Ohio ;  John  L.  Riker,  a  New  York  capitalist ;  Oscar 
Grisch,  Arthur  G.  Yates,  of  Rochester,  president;  John  H.  Ho- 
cart,  secretary  and  assistant  treasurer,  New  York. 

The  stock  does  not  appear  to  be  very  widely  held. 

(118) 


BUFFALO,  ROCHESTER  &  PITTSBURGH  119 

As  already  noted,  the  company  is  highly  independent,  and  is 
not  especially  identified  with  any  of  the  larger  lines. 

Capitalization. 

The  capital  account  on  June  30th,  1906,  stood  as  follows : 

Common  stock $10,500,000 

Preferred    stock 6,000,000 

Total $16,500,000 

Funded  debt   (net) 15,461,000 

Nominal  capital $31,961,000 

Rentals  cap.  at  4% 12,325,000 

Approximate  gross  capitalization..  $44,286,000 
Securities  held 1,028,855 

Approx.  net  cap $43,257,145 

Approx.  net  capitalization  per  mile.  .  $76,157 

Miles    operated 568 

Net  earnings  on  net  capital 7.6% 

Stock  on  net  capital 38% 

Fixed  charges  on  total  net  income.  .  53% 

Factor  of  safety 47% 

The  capitalization  of  $76,000  per  mile  compares  with  $131,000 
per  mile  for  the  Pittsburgh  and  Lake  Erie,  its  most  direct  com- 
petitor, and  with  $94,000  per  mile  for  the  Nickel  Plate. 

Its  capitalization  compared  with  its  net  earnings  is  moderate, 
its  7.6%  comparing  with  4.2%  for  the  Nickel  Plate,  and  11.8% 
for  the  Pittsburgh  and  Lake  Erie. 

The  Fixed  Charges  consume  only  about  one-half  of  the  total 
net  income,  leaving  a  wide  margin  of  safety  for  the  securities  of 
the  company. 

Increase  of  Capitalization. 

As  will  be  seen  trom  the  following,  the  increase  of  capital- 
ization for  the  last  six  years  has  been  small,  while  the  gross 
earnings  have  increased  by  56%. 


120 


BUFFALO,  ROCHESTER  &  PITTSBURGH 


Year 

Common 
Stock 

Preferrti! 
Stock  6% 

Funded 

Debt 

Total 

Securities 
Held 

Gross 

1899-00 
1905-06 

$6,000,000 
10,500,000 

$6,000,000 

6,000,000 

112,462,000 
15,461,000 
(net) 

124,462,000 
31,961,000 

1,028,855 

$4,992,147 
7,829,451 

Net  increase  over  six  years :  Nominal  capital,  30% ;  Gross 
earnings,  56%. 

Equities  Owned. 

The  only  considerable  holding  of  the  company  was  the  stock 
of  the  Rochester  and  Pittsburgh  Coal  and  Iron  Company,  car- 
ried on  the  books  of  the  company  at  $1,003,000.  In  1906  the  lat- 
ter showed  nominal  profits  of  $216,000,  of  which  $120,000  was 
used  to  pay  principal  of  bonds,  and  the  balance  placed  to  the 
credit  of  profit  and  loss.  During  the  year  the  coal  company  ex- 
pended $147,000  in  improvements,  all  of  which  was  charged  from 
profit  and  loss  account.  The  operations  of  the  company  suffered 
heavily  through  the  strikes  in  the  spring  of  1906.  The  actual  income 
to  the  railway  from  this  source  was : 

1902-3 $600,000 

1903-4 320,000 

1904-5 .... 120,000 

1905-6 96,000 

In  consequence  of  the  enactment  of  the  new  railway  law  at 
the  close  of  1906,  the  stock  of  the  Coal  &  Iron  Company  was  sold 
to  the  Mahoning  Investment  Company,  in  return  for  $4,125,000, 
par  value, — practically  the  entire  capital  stock  of  the  latter.  This 
stock  was  in  turn  distributed  to  the  shareholders  of  the  preferred 
and  the  common  equally,  each  shareholder  receiving  25%  of  the 
par  value  of  his  stock  in  stock  of  the  new  investment  company. 

Character  of  Traffic. 

Bituminous  coal  makes  up  on  the  average  from  65  to  70% 
of  the  total  tonnage  of  the  company,  other  single  items  being 
small.  The  revenue  received  is  relatively  low,  the  average  rate 
per  ton  per  mile  for  1906  being  .50c.  This  is  a  considerable  in- 
crease from  1899,  when  the  rate  had  fallen  to  .41  cent.  On  the 
other  hand,  the  1906  rate  is  a  decrease  from  that  of  1901  by  .04 
cent. 

It  will  be  seen  that  the  company  has  profited  very  materially 
from  the  "gentleman's  agreement"  which  in  1898  was  formed  to 
put  a  stop  to  the  disastrous  cutting  of  rates. 


BUFFALO,  ROCHESTER  &  PITTSBURGH 
Stability  of  Earnings. 


121 


From  the  following  table  it  will  be  seen  that  the  gross  earn- 
ings have  more  than  doubled  in  ten  years  and  that  earnings  per 
mile  have  increased  about  50%. 


Year 

Miles  Operated 

Gross  Earnings 

Earnings  per 

Mile 

1896-7 

339 

$3,311,766 

$  9,767 

1897-8 

336 

3,683,590 

10,963 

1898-9 

338 

3,788,456 

11,208 

1899-0 

405 

4,992,147 

12,326 

1900-1 

472 

5,803,692 

12,353 

1901-2 

472 

6,292,584 

13,375 

L902-3 

472 

7,404,503 

15,462 

1903-4 

499 

7,496.521 

15,090 

1904-5 

538 

8,138,274 

15,169 

1905-6 

568 

7,829,451 

13,784 

There  was  a  considerable  decline  in  the  coal  tonnage  in  the 
spring  quarter  of  1906,  which  with  the  slight  reduction  in  the 
average  rate,  brought  about  a  small  decrease  in  the  gross  earn- 
ings for  the  year. 

By  reason  of  its  traffic,  the  stability  of  the  road's  earnings  is 
absolutely  dependent  upon  the  conditions  of  the  coal  industry. 

Maintenance. 

For  the  year  of  1906  the  company  spent  $1,200  per  mile  on 
its  way  and  structures,  which  is  very  closely  the  average  figure 
for  the  last  six  years.  It  also  struck  very  closely  the  average  figure 
for  maintenance  of  equipment.  Together  these  amounted  to 
$3,100  per  mile.  On  the  equipment  side  this  would  allow  about 
$2,000  per  locomotive,  $800  per  passenger  car,  and  $40  per  freight 
car.  This  on  a  traffic  density  of  2,200,000  ton-miles  per  mile  of 
road  is  probably  adequate  maintenance. 


Year 

Traffic  Density 

Maintenanc 
Way 

:e  per  Mile 
Equipment 

Total 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

1,855,184 
2,150,492 
2,429,596 
2,257,264 
2,483,386 
2,185,450 

2,226,895 

$1,209 
1,132 
1,128 
1,181 
1,256 
1,202 

$1,472 
1,769 
2,094 
2,274 
2,443 
1,935 

$2,681 
2,901 
3,222 
3,455 
3,699 
3,137 

Average, 

$1,184 

$1,998 

$3,182 

122 


BUFFALO,  ROCHESTER  &  PITTSBURGH 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

$1,861 

14,888 

2,042 

Equipment 

2,368,817 
6,989,301 
2,528,054 

$3,216 

10,530 

1,966 

$5,077 

25,418 

4,008 

Pitts.  &  L.  Erie 
N.Y.C.&St.  h. 

Second  Track:  168  miles,  equalling  30%. 

Improvements. 

Through  a  series  of  years,  the  road  has  set  aside  annually 

sums  for  betterment  as  follows : 

1899-0 $446,977 

1900-1 530,134 

1901-2 583,562 

1902-3 950,749 

1903-4 497,389 

1904-5 413,516 

1905-6 394,141 

The  B.,  R.  &  P.  shows  of  course,  nothing  like  the  enormous 

expenditures  which  have  been  made  by  the  Pittsburgh  and  Lake 

Erie,  but  on  the  other  hand  it  has  nothing  like  the  traffic  upon  the 

latter. 

Surplus  Earnings. 

For  the  last  five  years  the  surplus  earnings  of  the  company 
have  averaged  between  fourteen  and  fifteen  hundred  thousand 
dollars  per  year,  showing  the  highest  figure  in  the  year  of  1902-3. 
It  should  be  understood  that  the  items  of  surplus  shown  are  the 
amounts  shown  before  the  special  improvement  fund  has  been 
charged  off. 


Dividends 

%  Earned 

Dividends 

Average 
Price 

Year 

Surplus 

Paid  on 

on  Common 

Paid  on 

Preferred 

Stock 

Common 

1901-2 

$1,273,266 

6 

15.2 

4 

100 

1902-3 

1,781,595 

6 

17.1 

4 

129 

1903-4 

1,513,264 

6 

12.8 

5/2 

140 

1904-5 

1,387,271 

6 

9.8 

6 

139 

1905-6 

1,510,644 

6 

10.9 

6 

152 

Dividend  Record. 

It  was  eight  years  after  the  reorganization  of  the  company 
before  dividends  were  paid  even  on  the  preferred,  and  dividends 


BUFFALO,  ROCHESTER  &  PITTSBURGH  123 

on  the  common  were  not  paid  until  1901.    The  items  for  the  vari- 
ous years  were  as  follows  : 

Year.  Preferred  %.  Common  %. 

1892 5 

1893 V/4 

1897 1 

1898 2 

1899 2 

1900 6 

1901-2 6  4 

1903 6  sy2 

1904-6 6  6 

The  Balance  Sheet. 

The  balance  sheet  for  1906  showed : 

Current   assets   of $1,974,522 

Current    liabilities 1,135,507 

Leaving  a  balance  of $839,015 

Of  the  current  assets,  $432,000  was  in  cash. 
The  amount  to  the  credit  of  Profit  and  Loss  at  the  end  of 
the  year  was  $2,325,754. 

Investment  Value. 

The  dividend  on  the  preferred  has  been  paid  for  the  last  six 
years,  and  the  surplus  in  this  period  was  amply  sufficient  to 
ensure  these  payments,  which  consume  only  $360,000.  A  like 
dividend  is  paid  on  the  common  stock.  After  6%  has  been  paid 
on  the  common,  the  two  stocks  share  alike. 

The  preferred  sold  as  low  as  $140  per  share  in  1904,  recover- 
ing to  $164  in  1905.  After  charging  about  the  usual  amount  for 
special  improvements,  the  surplus  was  ample  to  pay  the  6%  divi- 
dend on  both  stocks. 

Yet  even  under  these  conditions  a  quotation  of  $165  for  the 
preferred  shares  appears  rather  high.  A  solid  6%  preferred 
stock  is  hardly  entitled  to  sell  over  $150  per  share  without  specu- 
lative prospects.  The  Buffalo  and  Rochester  distinctly  has  such 
prospects,  but  on  the  other  hand,  with  its  earnings  pivoted,  so 
to  speak,  upon  a  single  industry,  it  is  not  a  stock  without 
risks. 

The  6%  payments  on  the  preferred  have  not  amounted  to 
more  than  25%   of  the  average  surplus  shown  in  the  past  five 


124  BUFFALO,  ROCHESTER  &  PITTSBURGH 

years,  and  with  the  reservations  noted  above,  may  be  regarded  as 
a  stable  dividend.  On  the  other  hand,  the  road  has  shown 
earnings  of  not  much  over  6%  on  the  common,  after  allowing  for 
a  reasonable  amount  of  new  construction.  Unless  therefore  the 
earnings  very  considerably  increase,  it  is  scarcely  likely  that  the 
dividend  will  be  augmented  in  the  immediate  future. 

Six  per  cent,  dividends  have  now  been  paid  on  the  common 
for  three  years,  though  it  is  to  be  recalled  that  any  dividend  on 
the  common  dates  back  only  to  1901.  The  quotations  on  the 
common  were  run  up  to  $150  per  share  at  the  beginning  of  1903, 
this  price  being  a  considerable  rise  from  the  price  of  the  high 
year  of  1902.  In  the  slump  of  1904,  it  sold  off  to  $118  per  share, 
recovering  to  $160  in  the  same  year. 

It  has  not  touched  the  latter  figure  since,  and  in  the  general 
decline  of  March,  1907,  it  sold  as  low  as  $80.  But  this  price  was  of 
course  made  after  the  distribution  of  the  stock  derived  from  the 
transfer  of  the  coal  properties.  The  direct  net  income  from  the 
coal  company  to  the  railway  company  was,  however,  in  1905  and 
1906,  very  small. 

The  stock  is  not  an  active  one,  and  is  rather  closely  held.  At 
somewhere  in  the  neighborhood  of  $125  per  share  it  offers  slightly 
less  than  a  5%  investment,  with  fair  prospects  for  additional 
dividends  if  the  prosperity  of  the  bituminous  coal  industry  con- 
tinues and  no  strikes  intervene.  If  the  price  could  fall  to  $80 
with  business  conditions  as  good  as  those  of  1907,  it  might  read- 
ily do  so  again,  so  that  somewhere  between  this  price  and  $125 
it  would  probably  appear  to  the  investor  an  inviting  purchase. 


CANADIAN   NORTHERN   RAILWAY. 


The  Canadian  Northern  is  a  new  line,  designed  to  parallel 
the  Canadian  Pacific  throughout  the  greater  part  of  its  length 
and  of  which  about  2,500  miles  had  been  completed  at  the  close 
of  the  fiscal  year  of  1906.  Its  construction  was  obviously  stimu-* 
lated  by  the  great  financial  success  of  the  Canadian  Pacific.  For 
the  present  the  main  line  extends  from  Port  Arthur  on  Lake 
Superior  through  Winnipeg,  to  Edmonton  in  the  Canadian 
northwest.  The  road  leases  the  Northern  Pacific  &  Manitoba 
Railway,  which  is  leased  by  the  Northern  Pacific  to  the  pro- 
vincial government  of  Manitoba  and  sublet  by  the  latter  for  999 
years.  The  A^anitoba  government  has  the  option  to  purchase 
the  property  for  $7,000,000.  The  road  has  also  a  line  from 
Toronto  northward,  including  in  all  about  350  miles,  which  will 
eventually  be  extended  to  the  north  of  Lake  Superior,  to  join  the 
main  line  from  Port  Arthur.  Likewise  the  Canadian  Northern 
acquired  control  of  the  Great  Northern  of  Canada,  the  Chateau- 
gay  &  Northern  Railway  and  the  Quebec,  New  Brunswick  & 
Nova  Scotia  Railway.  These  three  roads  were  consolidated  in 
1906  under  the  name  of  the  Canadian  Northern  &  Quebec  Rail- 
way Company  and  afford  the  road  entrance  into  the  cities  of 
Ottawa,  Montreal  and  Quebec.  The  road  will  be  extended  west- 
ward to  the  base  of  the  Rocky  Mountains,  the  design  being  to 
tap  the  rich  wheat  fields  of  the  Canadian  northwest,  and  a  line 
is  also  projected  from  Eloimami  at  the  northwest  corner  of 
Manitoba  to  Fort  Churchill  on  Hudson  Bay,  suggesting  the  pos- 
sibility of  a  short  wheat  route  from  the  latter  point  to  Europe. 

The  enterprise  is  being  financed  by  Wm.  Mackenzie,  Sena- 
tor Geo.  A.  Cox,  and  the  Canadian  Bank  of  Commerce.  Wm. 
Mackenzie  is  president  and  the  Board  of  Directors  in  1906  in- 
cluded D.  D.  Mann,  Vice-President;  Z.  A.  Lash  and  Frederic 
Nicholls,  all  of  Toronto,  Canada ;  and  R.  M.  Horne-Payne,  of 
London. 

As  of  June  30th,  1906,  the  company  had  outstanding  the 
following  securities: 

(125) 


126 


CANADIAN  NORTHERN 


Capital    Stock $30,750,000.00 

Four  Per  Cent.  Perpetual  Consolidated 

Debenture    Stock 10,901,333.32 

Bonds   24,585,136.70 

Car  Trust  Obligations    4,180,915.61 


Total  Capital   $70,417,385.63 

The  company  had  completed  at  the  close  of  the  year  2,482 
miles.  Deducting  the  351  miles  leased  from  the  provincial  gov- 
ernment this  would  leave  a  little  over  2,100  miles,  and  if  this 
were  all  that  were  covered  by  the  capitalization  tabled  above, 
this  would  represent  an  issue  of  securities  to  the  amount  of 
around  $33,000  per  mile.  Beyond  the  $3,630,000  of  miscellaneous 
bonds  carried  on  the  books  at  a  cost  of  $1,946,666,  the  company's 
balance  sheet  did  not  show  further  saleable  assets. 

The  earnings  are  as  yet  small,  comparison  of  mileage  and 
earnings  for  four  years  showing  as  follows : 


Year 

Average  Miles 
Operated 

Gross  Earnings 

Per  Mile 

1 902-3 

1,236 
1,349 
1,586 
2,064 

$2,449,579 
3,242,703 
4,190,212 
5,903,755 

$1,981 

1903-4 

2,402 

1904-5 

2,641 

1905-6 

2,860 

The  traffic  density  was  correspondingly  low,  but  even  when 
due  consideration  has  been  given  to  this,  it  is  difficult  to  under- 
stand the  maintenance  charges.  These  for  three  years  compare 
as  follows : 


Traffic  Density 

Maintenance 

Total 

Way 

$353 
351 
391 

Equipment 

$219 

259 

284 

1903-4 

218,309 
243,275 
259,349 

$572 

1904-5 

610 

1905-6 

675 

It  is  difficult  to  believe  that  even  a  new  road  can  be  kept  up 
at  an  average  charge  of  $350  per  mile  or  equipment  maintained 
at  an  average  charge  of  $250  per  mile,  even  though  net  earnings 
be  below  $3,000  per  mile. 

Even  with  these  very  light  maintenance  charges,  operating 
expenses  in  1906  consumed  66%  of  the  gross  earnings.  Fixed 
charges,  not  including  taxes,  for  the  year  consumed  69%  of  the 
net  earnings,  leaving  a  surplus  for  the  year  of  $719,574.  This 
was  equivalent  to  2.3%  on  the  outstanding  capital  stock. 


CANADIAN  NORTHERN  127 

The  company  has  a  land  grant  of  about  two  million  and 
a  half  acres,  of  which  a  million  and  one  half  are  available  for 
sale.  The  larger  part  of  the  outstanding  bonds  are  guaranteed 
either  by  the  provincial  government  of  Manitoba  or  by  the 
government  of  Canada. 

The  enterprise  is  not  yet  sufficiently  advanced  to  consider 
its  securities  from  a  solid  investment  point  of  view.  The  last 
few  years  for  the  Canadian  northwest  have  been  years  of  un- 
paralleled prosperity,  with  a  tremendous  inrush  of  immigration. 
In  the  past  these  huge  "booms"  have  invariably  been  followed 
by  a  drastic  reaction.  It  is  obvious  that  such  a  reaction  would 
severely  influence  the  securities  of  this  company  if  it  were  to 
take  place,  as  the  larger  part  of  its  revenues  are  drawn  from  these 
newer  fields.  From  this  it  follows  that  the  securities  of  the 
company  are  as  yet  entirely  in  the  speculative  stage  and  ought 
not  to  be  otherwise  considered  by  the  investor. 


CANADIAN  PACIFIC  RAILWAY. 

The  Canadian  Pacific  shares  with  the  Russian  Siberian  Rail- 
road the  distinction  of  being  the  only  true  transcontinental  line, 
in  the  full  sense  of  the  word,  in  the  world.  It  is  the  only  Ameri- 
can railway  operating  over  more  than  half  the  continent.  Its 
lines  extend  from  Halifax  and  St.  John  on  the  Atlantic,  and  from 
Quebec  on  the  Gulf  of  the  St.  Lawrence,  to  Vancouver  on  the 
Pacific.  They  reach  Toronto  and  Detroit ;  through  the  ownership 
of  the  "Soo,"  they  reach  Minneapolis  and  St.  Paul  and  extend 
through  Minnesota  and  North  Dakota;  through  the  Duluth  and 
South  Shore  they  reach  Duluth  and  the  rich  iron  district  of  north- 
ern Michigan.  A  net  work  of  lines  covering  Manitoba,  and  others 
extending  westward,  make  it  the  chief  forwarding  agency  in  the 
richest  wheatfields  of  the  continent. 

In  addition  to  its  railways  the  Canadian  Pacific  operates  a 
fleet  of  sixty  vessels,  running  from  Halifax  and  Quebec  to  Liver- 
pool, from  Vancouver  to  Honolulu.  China  and  Japan,  and  cross- 
ing the  Great  Lakes  as  well.  Besides  these  properties  the  road 
possesses  farm  land  of  an  estimated  value  of  from  sixty  to  a  hun- 
dred million  dollars. 

A  large  part  of  the  road  was  built  from  the  subsidy  and  funds 
received  from  the  lavish  land  grants  of  the  Canadian  government ; 
its  capitalization  is  still  low,  and  its  financial  condition  is  excel- 
lent. It  stands  second  only  to  the  Pennsylvania  in  the  number  of 
its  shareholders. 

History. 

The  Canadian  Pacific  was  chartered  in  1881  and  its  main 
line  opened  throughout  six  years  later.  The  subsidy  of  the 
Dominion  government  amounted  to  $25,000,000,  and  "habitable 
land"  from  which  the  road  has  already  derived  twice  this  sum. 
Originally  a  single  track  of  iron  from  Montreal  to  the  Pacific,  by 
purchase  and  new  construction  it  has  steadily  added  to  its  line 
until  in  1906  it  included  8,777  miles  in  its  returns;  it  operated 
separately  438  miles  more,  and  had  923  miles  under  construction. 

(128) 


CANADIAN  PACIFIC  129 

This  gives  a  total  of  10,138  miles;  and  if  we  add  the  mileage  of 
the  Minneapolis,  St.  Paul  and  Saulte  Ste.  Marie  (2,153  miles)  and 
the  Duluth  and  South  Shore  (593  miles),  the  total  amounts  to 
12,833  miles. 

Ownership. 

The  line  was  built  by  a  group  of  Canadian  capitalists,  of 
whom  Donald  Alexander  Smith  (now  Lord  Strathcona),  Sir  Wil- 
liam C.  Van  Home,  Richard  B.  Angus,  and  Sir  George  A.  Drum- 
mond  were  the  leading  spirits,  and  it  is  still  under  their  active 
control. 

The  directorate  of  1906  included  Sir  William  C.  Van  Home, 
chairman,  Lord  Strathcona,  Richard  B.  Angus,  Edmund  B.  Os- 
ier, M.  P.,  Sir  Sandford  Fleming,  Wilmot  B.  Matthews,  Charles 
R.  Hosmer,  Sir  George  Drummond,  Senator  Robert  Mackay,  R. 
G.  Reid,  Senator  L.  G.  Forget,  and  President  Sir  Thomas  Shaugh- 
nessy,  all  of  Canada;  Thomas  Skinner  of  London,  and  Clarence 
H.  Mackay,  President  of  the  Postal  Telegraph  Cable  Company, 
New  York. 

The  executive  committee  included  Sir  William  Van  Home, 
Lord  Strathcona,  Mr.  Angus,  Mr.  Osier  and  President  Shaugh- 
nessy. 

Aside  from  the  land  grant  funds,  the  road  was  built  largely 
with  British  money  and  the  bulk  of  its  securities  are  held  by  English 
investors.  It  is  stated  that  the  company  has  over  30,000  share- 
holders, which  compares  with  44,000  for  the  Pennsylvania,  the 
largest  number  in  any  road  in  the  United  States. 

Capitalization. 

On  June  30,  1906,  the  capital  account  stood  as  follows : 

Common    stock $101,400,000 

Preferred    stock 42,719,999 

Total $144,119,999 

Bonds   outstanding 41,738,086 

Debenture   stock 101,519,411 

Nominal   capital $287,377,496 

Rentals  capit.  at  4% 16,250,000 


130  CANADIAN  PACIFIC 

Approx.  gross  capital $303,627,496 

Securities  held 52,492,909 

Approximate    net    capital $251,134,587 

Approx.  net  capitalization  per  mile.  $28,613 

Miles  operated 8,777 

Net  earnings  on  net  capital 9.4% 

Stock  on  net  capital 57% 

Fixed  Charges  on  total  net  income  33% 

Factor  of  Safety 67% 

Inasmuch  as  a  considerable  part  of  the  road  lies  in  eastern 
Canada,  its  capitalization  of  $28,613  per  mile  is  exceptionally  low. 
This  figure  compares  with  $59,512  for  the  Northern  Pacific;  $42,362 
for  the  Great  Northern,  and  with  $96,400  for  the  Grand  Trunk 
Railway,  its  chief  competitors.  Moreover,  the  net  earnings  on  the 
estimated  net  capitalization  show  a  high  percentage,  its  9.4%  com- 
paring with  9.6%  for  the  Northern  Pacific,  and  10.1%  for  the  Great 
Northern. 

Equities  Owned. 

On  June  30th,  1906,  the  company  held  other  securities  of  a  par 
value  of  $97,000,000,  of  which  the  following  were  the  chief  items : 
Duluth,  South  Shore  &  Atlantic,  consolidated  mortgage. $15, 107,000 
do.  income   certificates ....     3,000,000 

do.  preferred  stock 5,100,000 

do.  common  stock 6,100,000 

Minneapolis,  St.  Paul  &  Sault  Ste  Marie  preferred  stock     3,533,400 

do.  common  stock 7,066,600 

do.  consolidated  mtge  bonds     3,933,000 

Manitoba    and    Northwestern,    common 5,612,000 

Atlantic     and     Northwestern,     guaranteed  stock 3,240,000 

Columbia  and  Western,  first  mortgage  bonds 5,691,000 

The  total  of  these  securities  is  carried  on  the  books  at  a  cost 
of  $52,472,909. 

The  earnings  of  the  "Soo"  line  are  high,  the  stock  netting  7% 
on  the  preferred,  4%  on  the  common,  and  the  undistributed  surplus 
amounting  to  about  as  much  more. 

The  Duluth  and  South  Shore  is  operated  at  a  loss,  and  the 
company's  other  equities,  save  in  its  lands,  are  of  no  considerable 
value,  as  compared  with  the  magnitude  of  the  company. 


CANADIAN  PACIFIC  131 

Land  Grants. 

The  Canadian  Pacific  and  its  subsidiary  lines  received  a  total 
of  30,000,000  acres,  or  if  the  2,500,000  acres  which  the  company  is 
to  receive  through  the  Columbia  and  Western  Railroad  be  included, 
over  33,000,000  acres.  From  this  it  has  sold  off  10,500,000  acres, 
and  turned  back  to  the  Dominion  government  nearly  seven  million 
acres,  deriving  from  this  source  a  total  of  over  fifty  million  dollars 
to  date. 

Of  this,  $36,000,000  has  been  charged  to  construction  and  equip- 
ment, and  deducted  from  the  cost  of  the  railway  property,  leaving 
a  credit  balance  included  in  the  company's  assets  of  $14,500,000. 
The  year  of  1905-6  was  one  of  extraordinary  prosperity  for  the 
Canadian  northwest,  and  was  reflected  in  heavily  increased  land  sales 
by  the  road,  the  proceeds  for  the  year  amounting  to  $6,900,000. 

During  the  year  the  Canadian  Pacific  paid  the  Dominion  gov- 
ernment $6,500,000  on  its  land  grant  bonds,  leaving  then  only  $1,- 
500,000  of  these  bonds  outstanding.  These  bonds  lie  against  some 
13,400,000  acres  of  company  lands  which  are  otherwise  clear.  The 
average  amount  realized  from  the  sale  of  a  million  acres  during  the 
year  was  a  little  under  $6  per  acre.  Prospective  town  sites  included, 
the  remaining  lands  can  scarcely  be  worth  very  much  less,  certainly 
not  if  the  deferred  payments  on  land  and  town  site  sales  outstanding, 
amounting  to  $16,383,000,  be  included. 

If  the  2,500,000  acres  yet  to  be  received  be  included,  the  total 
reaches  nearly  to  16,000,000  acres,  which,  at  no  more  than  three 
dollars  an  acre,  amounts  to  $48,000,00 ;  and  this,  with  the  $16,000,000 
outstanding,  would  make  up  total  land  assets  of  $64,000,000. 

The  Canadian  Pacific's  laud  holdings  even  at  a  low  valuation, 
can  scarcely  be  worth  less  than  this,  and  should  the  Canadian  north- 
west meet  with  no  such  drastic  years  of  adversity  as  came  in  the 
nineties,  they  would  eventually  be  worth  much  more,  perhaps  much 
in  excess  of  $100,000,000. 

Were  this  amount,  or  half  of  it,  deducted  from  the  capitaliza- 
tion, it  would  bring  the  average  per  mile  to  an  amount  far  below  that 
of  any  other  great  trunk  line. 

Style  of  Capitalization. 

The  makeup  of  the  capital  account  differs  very  considerably 
from  the  customary  style  of  American  roads.  With  the  completion 
of  payments  on  the  new  issues,  the  common  stock  will  amount  to 
$121,680,000.     This,  with  the  preference  stock  outstanding,  makes 


132 


CANADIAN  PACIFIC 


up  a  total  of  $164,400,000  of  stock,  or  over  60%  of  the  estimated  net 
capitalization,  leaving  only  40%  for  the  funded  debt.  This  is  a 
strong  position  for  any  company  to  be  in. 

The  position  of  the  Canadian  Pacific  is  even  more  favorable 
than  this.  The  amount  of  the  first  mortgage  bonds  is  relatively  small, 
only  $40,000,000  out  of  an  estimated  capitalization  of  more  than  a 
quarter  of  a  billion.  The  balance  of  the  funded  debt  is  in  the  form 
of  4%  debenture  stock.  This  amounted  on  June  30th,  1906,  to 
$101,000,000,  against  which  securities  were  held  to  book  value  of 
$52,000,000.  This  debenture  stock  is  perpetual,  and  the  interest  is 
cumulative,  and  in  the  default  of  the  interest  the  stockholders  may 
sue  and  obtain  judgment  against  the  company;  but  the  stock  carries 
no  mortgage,  and  is  not  like  a  mortgage,  foreclosable. 

The  Fixed  Charges  for  1905-6,  including  rentals  and  the  inter- 
est on  the  debentures,  consumed  only  33%  of  the  total  net  income 
shown,  leaving  a  Factor  of  Safety  of  67%.  But,  as  indicated  above, 
this  factor  is  in  reality  stronger  than  it  looks. 

The  present  amount  of  4%  preferred  stock  consumes  only  7% 
more  of  the  net  income,  so  that  the  Factor  of  Safety  on  the  pre- 
ferred is  60%,  making  it  a  very  strong  preferred  stock. 

Increase  of  Capitalization. 

Despite  enormous  outlays,  mainly  for  new  construction,  the  in- 
crease in  the  capitalization  in  the  last  five  years  has  been  much 
less  than  it  might  have  been  anticipated,  and  very  much  less  than 
the  corresponding  increase  in  gross  earnings.  The  following  are 
the  items : 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt 

Total 

Gross 
Earnings 

1900-1 
1905-6 

$65,000,000 
101,400,000 

$31,171,000 
42,719,999 

$125,438,161 
143,257,497 

$221,609,161 
287,377,496 

$30,855,203 
61,669,758 

Net  increase  over  five  years:  Nominal  capital,  30%.  Gross 
earnings,  100%. 

The  increase  for  the  year  of  1901  amounted  to  $34,000,000  of 
stock  and  debentures,  this  being  offset  by  a  reduction  of  $13,500,000 
in  the  funded  debt,  the  net  increase  for  the  year  amounting  to 
$21,500,000. 

The  increase  for  the  year  1906-7  includes  $20,280,000  of  com- 
mon stock,  almost  all  sold  before  June  30th,  1906,  and  on  which 
more  than  25%  had  been  paid  in;  and  in  January,  1907,  $7,500,000 
preferred  stock  was  sold  in  London.     The  issue  of  the  preferred 


CANADIAN  PACIFIC 


133 


stock  is  limited  to  one-half  the  amount  of  the  common  stock  out- 
standing. 

In  1906  the  Minneapolis,  St.  Paul  and  Sault  Ste.  Marie  Railway 
issued  an  additional  $5,820,000  consolidated  mortgage  bonds  for  the 
construction  of  291  additional  miles  of  road,  the  interest  on  which 
is  guaranteed  by  the  Canadian  Pacific. 

Character  of  Traffic. 

The  Canadian  Pacific  does  not  reduce  its  items  of  freight  traffic 
to  tons.    The  main  features  for  1906  were  as  follows: 

Grain,  2,000,000  bushels, 

Lumber,  1,804,000,000  feet, 

Flour,  5,994,000  barrels, 

Livestock  1,428,000  heads, 

Manufactured  articles,  3,818,000  tons, 

Other  articles,  4,098,000  tons. 

In  a  broad  sort  of  way  the  Canadian  Pacific  is  mainly  a  grain 
carrier,  and  its  prosperity  is  absolutely  bound  up  with  that  of  the 
wheat  fields  of  the  Canadian  northwest.  This  is  its  principal  source 
of  revenue. 

Freight  traffic  receipts  made  up  two-thirds  of  the  gross ;  pas- 
senger a  little  over  25%. 

The  earnings  of  the  steamship  lines  are  not  separately  tabulated, 
but  these  items  together  with  the  revenue  from  sleeping  cars,  express 
elevators,  telegraph  and  miscellaneous,  made  up  10%  of  the  gross. 

Stability  of  Traffic. 

While  the  mileage  of  the  Canadian  Pacific  has  increased  one- 
third  in  ten  years,  the  gross  earnings  have  been  multiplied  three 
times.  The  earnings  per  mile  have  been  more  than  doubled,  as  the 
table  reveals : 


Year 

Miles  Operated 

Gross  Earnings 

Ter  Mile 

1892 

6015 
6360 
6476 
6567 
6681 
7000 
7563 
7588 
7748 
8133 
8568 
8777 

$21,409,352 
18,752,167 
20,681,597 
24,049,535 
26,138,977 
29,230,038 
30,855,203 
37,503,053 
43,957,373 
46,469,132 
50,481,882 
61,669,758 

$  !54  1 

1894 

2901 

1896 

3191 

1897 

3662 

1898 

3012 

1899 

1175 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

-1079 
4942 
5673 
5714 
5892 
7026 

134 


CANADIAN  PACIFIC 


It  is  to  be  noted  that  the  figure  for  1905-6  shows  an  extra- 
ordinary increase,  which  was  due  in  part  to  the  very  open  winter 
and  in  part  to  the  enormous  immigration  into  the  Northwest  Ter- 
ritory. This  exceptional  advance  can  hardly  be  sustained 
through  any  period  of  years.  It  is  not  improbable  that  with  the 
decline  of  the  "boom,"  this  figure  will  show  a  decrease. 

Maintenance. 

It  has  often  been  noted  that  the  great  surplus  recently  shown 
by  the  Canadian  Pacific  has  been  made  up  on  a  basis  of  mainte- 
nance charges,  which  are  considerably  lower  than  that  of  most 
American  roads.  President  Shaughnessy  stated  in  his  report  for 
1906  that  "it  is  the  policy  to  replace  at  the  cost  of  working  ex- 
penses, all  rolling  stock  that  becomes  obsolete  or  destroyed,  car 
for  car,  locomotive  for  locomotive,  without  reference  to  the 
increased  capacity  and  cost  of  more  modern  standard  equipment. 
As  a  consequence,  every  car  and  locomotive  shown  in  the  inven- 
tory of  rolling  stock  is  either  in  service,  or  is  provided  for  in  the 
equipment  replacement  fund." 

The  charges  for  way  and  equipment  have  not  been  itemized 
according  to  the  American  custom,  save  from  1904;  the  averages 
for  the  three  preceding  years  have  been  compiled  from  Moody's 
Manual.  It  will  be  seen  that,  on  this  showing,  while  Traffic 
Density  has  doubled  in  the  six  years,  the  average  maintenance 
charges  were  considerably  higher  in  the  first  three  years  than  in 
the  latter  three.    The  items  compare  as  follows : 


Year 

Traffic  Density 

MaintenaiK 

:e  per  Mile 

Total 

Way 

Equipment 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

315,170 
428,034 
487,284 
451,311 
472,432 
597,306 

$554 
742 
867 
907 
995 

1 ,037 

$979 
1,219 
1,481 

722 
772 
839 

$1,533 
1,961 
2,348 
1,629 

1,767 
1,876 

Average 

458,589 

$850 

SI  ,002 

$1,852 

Traffic  Density 

MaintenaiK 

:e  per  Mile 

Total 

Way 

Equipment 

$594 

791 

1,049 

1,113 

1,246 

Great  Northern 
Union  Pacific... 

650,321 
729,102 
739,206 
577,005 
594,898 

$960 
1,300 
1,173 
1.123 
1,446 

$1,554 
2,091 
2,222 
2,226 
2,692 

CANADIAN  PACIFIC 


135 


It  will  be  seen  that  the  average  of  the  Canadian  Pacific's  charges 
compares  favorably  with  its  competitors,  the  Great  Northern  and  the 
Northern  Pacific ;  though  both  the  Hill  lines  are  much  below  their 
southerly  rivals  in  this  regard. 

The  comparison  of  the  various  roads  for  the  single  year  of 
1906,  stands  as  follows: 


Roads 

Traffic  Density 

Way 

Equipment 

Total 

678,554 
693,879 
990,815 
971,334 
835,342 
597,306 

si  ,775 
1,479 
1,519 
1,387 
1,092 
1,037 

$1,554 

1,271 

1,222 

1,098 

816 

839 

$3,329 
2,750 

Union  Pacific 

2  741 

Great  Northern 

2,485 
1,908 

1,876 

The  traffic  density  of  the  Canadian  Pacific  is  the  lowest  on  the 
list.  These  items  compared  there  is,  for  example,  between  the 
Canadian  Pacific  and  the  Atchison,  a  difference  of  at  least  $500  per 
mile  of  maintenance  charges.  An  Atchison  standard  on  the  Canadian 
Pacific's  9,000  miles  of  road  would  have  cut  its  surplus  down  by 
$4,500,000,  or  more  than  25%. 

Moreover,  while  the  Canadian  Pacific  does  not  differ  very 
greatly  from  the  practice  of  the  Great  Northern,  under  the  effective 
management  of  James  J.  Hill,  it  should  be  remembered  that  most 
American  roads  charge  off  large  sums  annually  from  earnings  for 
improvements. 

Improvements. 

During  the  year  of  1906  expenditures  for  improvements  and 
additions  on  the  Canadian  Pacific  amounted  to  $7,783,000  on  the 
company's  own  lines,  and  $757,580  on  leased  lines.  But  of  this 
account  it  appears  that  only  $2,535,000  came  from  the  surplus  in- 
come.   The  balance  apparently  was  supplied  by  the  sale  of  securities. 

No  statement  of  any  such  appropriation  from  surplus  appears 
in  the  report  for  1905-6.  It  may  be  inferred,  therefore,  that  no  large 
sums  have  been  especially  set  aside  after  the  fashion  of  American 
railroads.  The  company  follows  the  more  English  custom  of  making 
improvements  from  capital  additions. 

Surplus  Earnings. 

In  six  years  the  surplus  available  for  dividends  has  risen  from 
five  and  a  half  to  sixteen  and  a  half  million  dollars.     The  dividends 


136 


CANADIAN  PACIFIC 


on  the  preferred  stock  are  limited  to  4%.  Thus  it  was  that  the 
percentage  of  surplus  shown  on  common  stock  has  more  than 
doubled  in  the  same  period,  despite  a  considerable  increase  of  capital. 
If,  however,  the  percentages  shown  are  to  be  compared  for  the  pur- 
pose of  investment  with  the  corresponding  percentages  for  American 
roads,  this  nominal  surplus  should  be  considerably  decreased.  An 
addition  of  $500  per  mile  to  the  maintenance  charges  would  hardly 
more  than  bring  the  Canadian  Pacific  up  to  the  level  of  other  Pacific 
roads,  outside  of  the  Great  Northern,  and  this  amount  would  reduce 
the  surplus  shown  by  over  $4,000,000.  This,  however,  would  still 
leave  a  balance  of  between  ten  and  eleven  per  cent,  on  the  common 
stock  for  the  year,  thus  leaving  an  ample  margin  for  the  payment  of 
the  7%  dividend.    Comparisons  for  six  years  are  as  follows : 


Dividends 

Per  cent. 

Dividends 

Average 
Price 

Year 

Surplus 

on  Preferred 

Karned  on 

on   Common 

Stock 

Com.  Stock 

Stock 

1900-1 

$5,586,965 

4% 

6.6% 

5% 

92 

1901-2 

7,559,914 

4 

9.7 

5 

116 

1902-3 

10,071,461 

4 

10.3 

W 

125 

1903-4 

8,318,277 

4 

8.2 

6 

121    . 

1904-5 

9,105,686 

4 

7.5 

6 

121 

1905-6 

16,592,215 

4 

14.8 

6 

166 

Dividend  Record. 


The  Canadian  Pacific  has  an  enviable  record  among  Pacific 
roads  for  the  steadiness  of  its  dividends.  It  has  paid  the  4%  on  the 
preferred  stock  without  interruption  from  the  beginning  in  1894.  It 
began  the  payment  of  dividends  on  the  common  in  the  second  year 
of  its  existence  as  an  incorporated  road,  and  has  continued  them  with 
the  omission  of  but  a  single  year  since.  In  1906  the  stock  was  placed 
on  a  7%  basis. 


Year. 
1883. 
1884. 
1885. 


Dividends. 
..     2/2% 

..     5 
..     4 


1886-9 3 

1890-3 5 

1894 5 

1895 

1896-7 2y2 


Year. 

1898 

1899 

1900 

1901-2 5 

1903 sy2 

1904-6 6 

1906-7 7 


Dividends. 
...     4]/2 
...     4 

...    sy2 


CANADIAN  PACIFIC  137 

The  Balance  Sheet. 

As  of  June  30th,  1906,  the  balance  sheet,  excluding  materials 
and  supplies  on  hand,  showed : 

Current  Assets $23,087,544 

Current    Liabilities 1 1,323,924 


Leaving  a  working  balance  of. .  .$11,763,620 
In  addition  to  the  above,  there  were  deferred  payments  on  land 
and  town  site  sales  amounting  to  $16,382,823,  which,  while  not  a 
quick  asset,  might  have  been  so  included.    This  amount  would  have 
brought  the  company's  working  capital  up  to  $28,146,443. 

The  item  of  cash  was  $17,752,415,  and  the  balance  to  credit  of 
surplus  income,  corresponding  to  profit  and  loss  account  of  other 
roads,  was  at  the  close  of  the  year  $25,741,414,  from  which  the 
dividends  for  the  year — $3,896,400 — were  to  be  deducted. 

Investment  Value. 

The  Canadian  Pacific  has  hitherto  enjoyed  a  practical  monopoly 
of  all  of  western  Canada.  This  monopoly  is  being  abruptly  broken 
by  the  simultaneous  invasion  of  the  Great  Northern  and  the  Can- 
adian Northern,  and  the  projected  line  of  the  Grand  Trunk  Pacific. 
The  latter  will  parallel  the  Canadian  Pacific,  running  to  the  north, 
practically  from  end  to  end.  The  Canadian  Northern  has  already 
reached  into  the  wheat  fields  of  the  Northwest,  and  the  president  of 
the  Great  Northern  has  announced  plans  for  a  new  line  from  Win- 
nipeg to  the  Pacific,  with  numerous  branch  lines  connecting  with  the 
main  system.  In  brief,  these  rich  wheat  fields  are  witnessing  a 
greater  amount  of  railroad  construction  than  has  been  seen  on  this 
continent  for  more  than  fifteen  years.    It  is  estimated  at  5,000  miles. 

At  the  present  time  the  Canadian  Pacific's  average  freight  rate 
per  ton  mile  is  relatively  high,  though  not  as  compared  with  other 
Pacific  roads.  Its  average  rate  of  .74  cents  for  1906  was  rather  lower 
even  than  the  Great  Northern's,  which  is  the  lowest  among  the 
trans-continentals  of  the  United  States.  This  is  an  average  of  25% 
higher  than  the  general  freight  rates  of  eastern  North  America. 
The  freight  rates  on  the  eastern  portion  of  the  Canadian  Pacific  are 
considerably  below  the  average,  which  means  that  the  rates  in  the 
Far  West  are  above  it.  It  is  scarcely  probable  that  with  vigorous 
competition  these  rates  can  be  maintained.  For  a  year  or  two,  with 
the  continuance  of  the  present  extraordinary  prosperity,  the  dim- 


138  CANADIAN  PACIFIC 

inution  may  be  slight,  but  when  the  inevitable  reaction  comes,  the 
reduction  will  probably  be  considerable. 

The  meaning  of  this  is  very  simply  that  while  the  Canadian 
Pacific's  traffic  density  and  gross  tonnage  may  increase  heavily, 
gross  earnings  will  increase  in  lesser  ratio,  and  net  earnings  still 
less. 

The  road  is  in  excellent  condition  to  meet  this  competition ; 
its  estimated  capitalization  is  low,  the  percentage  of  net  earnings  on 
this  estimated  capitalization  is  high,  the  company  has  a  large  sur- 
plus, and  the  increasing  income  from  its  land  sales  places  it  in  a 
position  of  great  solidity.  It  has  few  weak  points.  It  is  established 
within  a  rich  territory,  and  its  steamship  lines  at  either  end  of  the 
road  enable  it  to  command  through  traffic. 

Nevertheless  this  competition  must  be  met,  and  this  question 
must  very  deeply  affect  the  investment  value  of  its  stock.  The  years 
that  follow  wild_  booms  are  proverbially  drastic  years  for  railways, 
and  it  would  be  exceptional  conditions  which  would  enable  the  road 
to  show  such  a  relative  surplus,  through  the  next  five  or  six  years, 
that  it  showed  in  1905-6.  In  a  word,  the  company's  securities  repre- 
sent rather  speculative  issues  and  the  investor  who  takes  the  risk 
which  is  involved  is  entitled  to  a  higher  return  upon  his  money  than 
would  be  the  case  if  its  territory  were  one  where  traffic  conditions 
were  relatively  fixed. 

The  surplus  shown  for  1905-6  was  altogether  exceptional,  repre- 
senting as  it  did,  a  year  of  abnormal  increase  in  gross  earnings 
(more  than  20%),  together  with  an  abnormal  winter,  conducive  to 
very  low  operating  charges. 

For  the  year  before,  very  far  from  an  unprosperous  year,  the 
percentage  shown  on  the  common  stock  was  a  little  more  than  half 
that  shown  in  1906.  Interest  will  be  paid  in  1906-7  on  twenty  mil- 
lions more  of  common  stock,  so  that  $1,400,000  must  be  added  to 
dividend  charges,  and  the  increase  of  one  per  cent,  in  the  dividend 
adds  nearly  as  much  more,  or  $2,600,000  in  all. 

This  can  be  paid  without  a  strain  under  present  conditions. 
Should  the  Northwest  meet  with  no  heavy  setback,  it  is  not  im- 
probable that  the  stock  can  be  maintained  on  a  7%  basis.  At  this 
rate  a  quotation  of  150  to  175  would  scarcely  be  regarded  as  ex- 
cessive, especially  in  view  of  the  fact  that  the  company's  policy  to- 
wards its  stockholders  has  been  extremely  liberal  in  the  matter  of 
rights,  and  that  the  profits  from  this  source  have  considerably  in- 
creased the  actual  dividends  paid  for  several  years. 


CANADIAN  PACIFIC  139 

But  beyond  its  immediate  earnings,  the  company  has  an  un- 
divided equity,  practically  clear  of  any  burdens,  equal  in  value  to  at 
least  the  half  of  the  common  stock.  This  is  not  a  "quick  asset."  It 
is  improbable  that  the  lands  could  be  sold  outright  now  for  such 
a  sum  as  this,  nor  could  they  be  leased  like  the  Great  Northern's  ore 
lands.  But,  after  the  small  amount  of  Land  Grant  bonds  has  been 
paid  off,  as  it  will  be  this  year,  land  sales  will  become  a  legitimate 
source  of  annual  revenue.  Supposing  the  land  sales  through  the 
next  ten  years  average  600,000  acres  annually  at  an  average  of  $6 
an  acre,  this  would  add  $3,600,000  to  the  company's  income,  repre- 
senting about  2y2c/o  on  the  common  stock.  The  New  York  Cen- 
tral's equities  in  its  subsidiary  roads  are  very  much  larger  than  this, 
and  in  fixing  the  price  of  the  stock  these  equities  may  be  taken  to 
represent  the  equivalent  of  a  one  per  cent,  annual  dividend  on  the 
stock. 

On  a  similar  basis  of  estimate,  the  Canadian  Pacific,  common, 
may  be  looked  upon  as  a  seven  per  cent,  stock,  with  rather  large 
speculative  possibilities.  If  the  company's  policy  regarding  rights 
be  continued,  the  stock  should  yield  to  its  possessor  from  eight  to 
ten  per  cent,  per  annum  on  the  par  value,  with  the  possibility  that  a 
portion  of  the  land  equity  may  be  distributed  in  the  form  of  a  stock 
dividend.  In  view,  however,  of  possibilities  of  keen  competition  and 
the  burden  of  added  dividends  it  would  involve,  such  a  stock  divi- 
dend would  be  regarded  in  conservative  circles  as  of  dubious  policy. 
Moreover,  it  should  be  remembered  that  Canadian  Pacific  stock  is 
speculative  in  more  senses  than  one  and  that  a  succession  of  bad 
harvests  might  very  seriously  cripple  the  road.  The  company  is 
as  susceptible  in  this  regard  as  any  of  its  transcontinental  rivals. 

In  1906  Canadian  Pacific  sold  up  to  202.  This  was  considerably 
in  advance  of  the  price  of  145  shown  in  the  prosperous  year  of  1902, 
and  was  a  rise  from  a  low  level  of  109  at  the  beginning  of  1904. 
On  a  7%  basis,  at  175,  the  Canadian  Pacific  common  is  a  4%  stock, 
with  the  possibility  of  an  increase  in  dividends  and  likewise  ad- 
ditional income  from  rights.  At  around  this  figure  the  stock  would 
be  an  attractive  purchase  to  speculative  investors.  At  much  beyond 
this  figure,  it  is  a  pure  speculation,  based  upon  the  possibility  of  a 
stock  distribution.  If  such  a  distribution  were  in  prospect,  the  stock 
might  readily  sell  higher  than  it  has,  but  cautious  investors  who  are 
not  gambling  in  possibilities,  would  probably  be  able  to  repurchase 
their  holdings  eventually,  did  they  sell  them,  at  considerably  below 
the  high  levels  of  1906.  It  is  not  improbable  that  the  high  figure 
reached  at  the  close  of  1906  may  represent  the  high  point  for  some 
time  to  come.    In  March,  1907,  the  stock  sold  down  to  $155. 


CENTRAL   OF   GEORGIA   RAILWAY. 

The  Central  of  Georgia  operates  a  network  of  railroads  ex- 
tending westward  from  Savannah  to  Chattanooga,  to  Birming- 
ham, to  Montgomery,  etc.,  and  owns  a  line  of  ocean  steamships. 
It  is  not  directly  a  part  of  the  Southern  Railway  system,  but  its 
stock  is  supposed  to  be  held  by  Southern  interests,  and  its  asso- 
ciation with  the  latter  is  close. 

The  Central  Railroad,  which  was  the  nucleus  of  this  system, 
is  one  of  the  oldest  railways  in  the  U.  S.,  having  been  begun  in 
1835,  and  completed  in  1843.  It  was  merged  with  the  Macon  and 
Western,  which  was  begun  in  1833.  It  had  built  up  by  amalga- 
mation and  otherwise  a  highly  prosperous  company,  paying 
heavy  dividends,  when  in  1888  the  Richmond  Terminal-Jay 
Gould  interests  obtained  control  of  the  road,  and  it  was  leased 
to  a  subsidiary  of  the  Richmond  Terminal  system.  Immediately 
there  was  the  usual  expansion  of  debt,  under  one  pretext  and  an- 
other, and  in  1892  receivers  were  appointed.  A  long  and  costly 
litigation  ensued,  and  in  1895  the  old  Central  Railroad  and  Bank- 
ing Company  of  Georgia  was  succeeded  by  the  present  organiza- 
tion, which  also  included  the  Savannah  and  Atlantic,  the  Macon 
and  Northern,  the  Savannah  and  Western,  the  Montgomery  and 
Eufanla,  and  the  Lowell  and  Gerard  Railways.  Several  smaller 
lines  have  been  added  since.  It  leases  the  Augusta  and  Savannah, 
the  Southwestern  Railway,  and  the  Chattanooga  and  Gulf,  and  oper- 
ates a  total  of  1,878  miles  of  road. 

The  directorate  of  the  road  includes :  Charles  Steele,  of  J.  P. 
Morgan  and  Company;  James  A.  Blair,  of  Blair  and  Company, 
New  York,  chairman  of  the  Seaboard  Air  Line;  George  G. 
Haven,  of  New  York,  a  member  of  the  executive  committee  of  the 
Atchison,  also  a  director  in  the  Morton  Trust  Company,  the 
Mutual  Life  Insurance  Company  of  New  York,  etc.;  John  F. 
Hanson,  Macon  Ga.,  president ;  Alexander  R.  Lawton,  Savan- 
nah, Ga.,  vice-president ;  W.  A.  Winburn,  Savannah,  Ga.,  second 
vice-president;  W.  C.  Bradley,  Columbus,  Ga. ;  J.  W.  English, 

(140) 


CENTRAL  OF  GEORGIA  141 

Atlanta;  Uriah  B.  Harrold,  Americus,  Ga. ;  Joseph  Hull,  Savan- 
nah ;  Samuel  R.  Jaques,  Macon ;  C.  B.  McCormack,  Birmingham, 
Ala. ;  George  J.  Mills,  Savannah  ;  J.  G.  Oglesby,  Atlanta. 

Capitalization. 

On  June  30th,  1906,  the  capital  account  of  the  road  stood  as 
follows : 

Common    stock $5,000,000 

Funded    debt 35,033,000 

1st  Income  bonds 4,000,000 

2nd        "             "     7,000,000 

3rd        "             "     4,000,000 

Equipment    Trusts 2,429,764 

Total  capital $57,462,764 

Rentals  capitalized  at  4% 8,804,025 

Approx.  gross  capitalization.   $66,266,789 
Securities  held 6,600,585 

Approx.  net  capitalization...   $59,666,204 

Approx.  net  capital  per  mile $31,771 

Average   miles   operated 1,878 

Net  earnings  on  net  capital 5.8% 

Stock  and  Incomes  on  net  cap 35% 

Fixed  Charges  on  total  net  income.  .  57% 

Factor  of  Safety 43% 

Rentals  paid,  less  the  rentals  received,  amounted  to  $352,161 
in  1906,  which  capitalized  on  the  usual  basis  of  4%,  gives  the  figure 
noted  above.  Securities  held,  including  those  pledged  under  vari- 
ous mortgages,  amount  to  $6,600,585,  but  the  company's  income  from 
its  investments  in  1906  was  only  $150,252,  which  is  less  than  2^2% 
on  the  book  value  of  the  properties.  A  considerable  part  of  the 
securities,  however,  was  the  $2,000,000  of  the  capital  stock  of  the 
Ocean  Steamship  Company  which,  in  1906,  paid  no  dividends. 

The  approximate  net  capitalization  per  mile  is  low,  comparing 
with  $49,223  per  mile  for  the  Southern  Railway,  $47,453  for  the 
Seaboard  Air  Line,  and  $39,684  for  the  Louisville  and  Nashville. 

In  consequence  of  its  comparatively  low  capitalization,  the  net 
earnings  in  1906  showed  5.8%  on  the  net  capitalization,  as  against 


142  CENTRAL  OF  GEORGIA 

4.2%  for  the  Southern  Railway,  3.7%  for  the  Seaboard,  and  8.9% 
for  the  Louisville  and  Nashville. 

Of  the  net  capitalization,  $15,000,000  is  in  the  form  of  income 
bonds  whose  charges  are  non-cumulative,  and  on  which  interest  is 
paid  only  when  earned.  These  income  bonds  are  a  lien  in  the  order 
of  their  priority,  on  the  Savannah  and  Western,  the  Columbus  and 
Rome,  and  on  the  Savannah  and  Atlantic  railways ;  also  a  third  lien 
on  the  main  line,  and  a  second  lien  on  all  securities  and  equities  ac- 
quired by  the  Central  of  Georgia.  Aside  from  this  security  they  are 
a  kind  of  preferred  stock  and  combining  these  with  the  small  amount 
of  capital  stock,  the  amount  of  securities  on  which  dividends  are 
optional  represents  35%  of  the  net  capitalization. 

In  1906  the  Fixed  Charges  consumed  57%  of  the  total  net  in- 
come, which,  however,  did  not  include  any  receipts  from  the  Ocean 
Steamship  Company.  This  left  a  nominal  factor  of  safety  of 
about  43%. 

Equities  Owned. 

Of  the  securities  owned,  the  largest  single  item  was  the  $2,- 
000,000  par  value  of  the  stock  of  the  Ocean  Steamship  Company,  of 
Savannah.    The  earnings  of  this  company  are  not  reported. 

The  road  also  owns  $1,500,000  par  value  of  the  Western  Rail- 
way of  Alabama  stock,  and  $1,589,000  of  the  income  bonds  of  the 
Charleston  and  Western  Carolina  Railway. 

Increase  of  Capitalization. 

The  additions  to  the  capital  of  the  road  within  six  years  from 
1900  have  been  very  slight,  the  amount  of  common  stock  and  in- 
come bonds  remaining  fixed,  and  the  funded  debt  having  increased 
by  about  25%.  The  total  increase  of  the  nominal  capital  was  12%, 
as  against  an  increase  in  gross  earnings  of  87%.  This  is  a  hand- 
some showing. 

Character  of  Traffic. 

In  1906  farm  products  contributed  20%  of  the  gross  tonnage  of 
the  road,  one-quarter  of  this  being  cotton;  bituminous  coal  con- 
tributed 14%,  and  lumber  23%,  the  balance  being  widely  distributed. 

Passenger  earnings  were  comparatively  high,  contributing  25% 
of  the  gross. 

Stability  of  Earnings. 

The  increase  of  the  traffic  of  the  road  within  ten  years  has  been 
very  striking.  From  the  first  full  year  of  the  reorganized  company, 
the  increase  of  mileage  and  earnings  have  been  as  follows : 


CENTRAL  OF  GEORGIA 
Earnings. 


143 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896-7 

1,491 

$5,280,696 

$3,540 

1897-8 

1,523 

5,507,070 

3,614 

1898-9 

1,523 

5,767,345 

3,785 

1899-0 

1,539 

6,086,263 

3,954 

1900-1 

1,678 

6,920,715 

4,124 

1901-2 

1,845 

7,750,691 

4,201 

1902-3 

1,845 

9,164,471 

4,968 

1903-4 

1,865 

9,396,931 

5,039 

1904-5 

1,878 

10,135,055 

5,397 

1905-6 

1,878 

11,396,123 

6,068 

It  will  be  seen  that  from  the  first  year  the  mileage  earnings  have 
increased  by  more  than  half.  This  advance  was  very  steady  and 
subject  to  no  setbacks  throughout  the  period. 

Maintenance. 

For  a  period  of  six  years  the  traffic  density  and  maintenance 
charges  show  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

$740 
780 

1,007 
978 
856 
982 

Equipment 

$495 
554 
767 
675 
929 
911 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

260,468 
255,548 
313,041 
300,097 
316,979 
373,339 

$1,235 
1,334 
1,774 
1,653 
1,785 
1,893 

Average 

303,245 

$890 

$722 

$1,612 

Traffic  Density 

Maintenam 

:e  per  Mile 

Total 

Way 

Equipment 

435,987 
311,366 
259,769 
929,594 

$860 
620 
709 

1,490 

$964 
611 
556 

1,537 

$1,824 
1,221 
1,265 
3,027 

Seaboard 

Atlantic  Coast.. 
Louis.  &  Wash. 

It  will  be  seen  that  the  average  traffic  density  is  one-third  less 
than  that  of  the  Southern  Railway,  but  the  average  maintenance 
charges  per  mile  have  been  only  $212  less  than  the  Southern,  while 
on  a  smaller  traffic  density  (but  higher  mileage  earnings),  than 
the  Seaboard,  its  maintenance  charges  have  averaged  nearly  $400 
per  mile  more. 


144 


CENTRAL  OF  GEORGIA 


The  appropriations  apparently  have  been  very  liberal,  and  cer- 
tainly seem  adequate.  These  amounts  include,  however,  the  amounts 
appropriated  from  income  to  improvements. 

Surplus  Earnings. 

On  the  basis  of  this  very  steady  increase  in  business  the  sur- 
plus has  risen  from  $200,000  in  1901  to  $1,250,000  in  1906.  The 
increase  for  the  latter  year  was  especially  notable,  amounting  to  a 
clear  jump  of  50%,  while  in  turn  that  of  1905  was  more  than 
double  the  surplus  of  1904.  That  is  to  say  the  earnings  for  1905 
and  1906  were  exceptional. 


Year 

Surplus 

Amount  paid 
on  1st  In- 
come Bonds 

Amount  paid 
on  2nd  In- 
come Bonds 

%   Earned 
on  2nd  In- 
come Bonds 

Av.   Price  of 

2nd  Income 

Bonds 

1900-1 

$201,352 

122,940 
203,508 
338,467 
854,517 
1,250,671 

5 
3 

5 
5 
5 
5 

.019 
.042 
.05 
1.97 
9.3 
15. 

28 

1901-2 

38 

1902-3 

31 

1903-4 
1904-5 
1905-6 

2 
5 
5 

51 

77 
86 

Dividend  Record. 

No  dividends  have  ever  been  paid  on  the  stock.  The  following 
rates  of  interest  have  been  paid  on  the  income  bonds  since  the 
organization  of  the  new  company : 


Year 


1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1905 
1906 


1st  Income 


2nd  Income 


1^ 
2# 

2 

2 

i% 

5 

3 

5 

5  * 

5 

5 


2 
5 

5 


3rd  Income 


Common 


The  Balance  Sheet. 

As  of  June  30th,  1906,  the  balance  sheet  showed : 

Current  assets  of $2,500,605 

Current   liabilities   of 1,152,801 


CENTRAL  OF  GEORGIA  145 

In  addition  to  the  latter  there  were  interest  and  rentals,  etc., 
accrued  of  $558,725,  making  a  total  of  $1,711,526  liabilities,  and 
leaving  a  working  balance  of  $789,079. 

The  item  of  cash  was  $1,216,489,  and  the  balance  to  the 
credit  of  Profit  and  Loss  at  the  end  of  the  year  was  $647,866. 

Investment  Value. 

The  stock  of  the  company  is  very  closely  held  and  seldom 
dealt  in.  The  principal  interest  of  the  public  is  in  the  bonds  and 
in  the  $15,000,000  incomes. 

The  full  5%  to  which  all  .  the  incomes  are  entitled  was 
earned  and  paid  in  the  years  1905  and  1906.  The  full  divi- 
dends on  the  $4,000,000  of  first  preference  incomes  were  paid  for 
four  years  to  1906,  and  in  that  time  the  bonds  ranged  in  price 
from  $61  in  1903  to  $101  in  1905,  touching  a  low  point  of  $84  in 
1906.  The  full  dividend  was  paid  on  the  second  preference  bonds 
in  1905  and  1906,  and  in  these  twTo  years  the  price  ranged  from 
^z  to  $91  per  share.  The  interest  on  the  third  preference  in- 
comes was  not  paid  previous  to  1905,  when  the  full  5%  was  de- 
clared. It  will  be  seen  from  the  table  of  surplus  earnings  that 
in  1906  the  amount,  after  paying  the  full  5%  on  all  these  income 
bonds,  was  $500,000,  or  more  than  50%  over  the  total  amount  re- 
quired for  the  interest  charges. 

This  left  about  10%  as  nominally  earned  on  the  $5,000,000 
of  common  stock.  It  is  evident  that  the  road  is  in  competent 
hands,  that  it  is  being  well  maintained,  and  that  its  business  is 
increasing  rapidly.  Its  association  with  the  Southern  Railway 
assures  it  comparative  freedom  from  destructive  competition, 
and  at  the  same  time  the  award  of  all  the  business  which  the 
Southern  can  turn  to  it.  There  seems  no  reason  therefore,  un- 
less a  very  severe  setback  should  come,  why  the  road  should 
not  earn  the  full  charges  on  its  income  bonds  and  something 
over.  Georgia,  it  is  true,  is  still  more  or  less  a  one-crop  state, 
but  its  lumber  interests  have  been  advancing  rapidly,  and  the 
lumber  traffic  furnishes  one-fourth  of  the  gross  tonnage  of  the 
Central.  Likewise  the  report  for  1906  notes  that  "over  two  mil- 
lion fruit  trees  were  coming  into  bearing  during  the  year,  and  in 
1906  likewise  194  new  industries,  with  a  capital  of  six  and  a  half 
million  dollars,  and  employing  seven  thousand  hands  were  estab- 
lished along  the  line  of  the  company."  In  other  words,  it  is  ap- 
parent that  in  1906  Georgia  was  enjoying  the  high  prosperity  of 
to 


146  CENTRAL  OF  GEORGIA 

the  country  in  general,  and  while  a  comparative  failure  of  the 
cotton  crop  might  bring  a  sharp  drop  in  the  Central's  securities, 
there  seems  no  reason  now  to  suppose  that  the  road  should  suf- 
fer another  such  entanglement  as  came  to  it  in  1888. 


CENTRAL  RAILROAD   OF   NEW  JERSEY. 

The  Jersey  Central,  as  it  is  familiarly  known,  is  in  reality  simply 
the  eastern  division  and  the  New  York'  terminal  of  the  Reading 
system.  The  majority  of  its  capital  stock  is  owned  by  the  Reading, 
its  directing  head  is  the  same,  and  the  road  is  operated  in  so  close 
association  with  the  parent  company  as  to  make  it  to  all  intents  a  part 
of  the  larger  road.  The  Central  of  New  Jersey  by  itself,  however, 
would  be  a  notable  road,  as  one  of  the  great  anthracite  "coalers," 
and  as  holding,  through  a  subsidiary  company,  vast  quantities  of 
anthracite  coal. 

History. 

The  fortunes  of  the  road,  like  the  Reading  itself,  have  been 
checkered  with  receiverships  and  foreclosures,  and  indeed  the  history 
of  the  two  companies  has  been  one  of  close  association  for  a  quarter 
of  a  century  and  more. 

The  road  suffered  severely  from  the  depression  that  followed 
1873,  and  in  1877  passed  into  the  hands  of  a  receiver.  In  1883  it 
was  leased  for  ninety-nine  years  to  the  old  Philadelphia  and  Reading, 
on  a  basis  of  6%  for  its  stock  and  the  interest  on  its  bonds.  The 
Reading  itself  was  unable  to  keep  on  its  feet,  and  both  roads  passed 
into  receivers'  hands  again.  The  lease  was  surrendered,  and  in  1887 
a  reorganization  of  the  Central  was  effected.  The  reorganized 
company  has  survived  from  this  date.  In  1892,  as  part  of  the  am- 
bitious dreams  of  the  McLeod  management,  the  road  was  again 
leased  to  the  Reading,  through  the  subsidiary  Port  Reading  Com- 
pany, but  this  lease  did  not  survive  the  year,  and  since  that  time  the 
road  has  been  continuously  operated  as  a  separate  company. 

In  1901,  with  the  accession  of  the  Baer  regime  in  the  Reading, 
a  controlling  interest,  $14,504,000  out  of  a  total  of  $27,131,800  par 
value  of  Central  of  New  Jersey  stock  outstanding,  was  purchased  by 
the  Reading,  and  George  F.  Baer  was  made  president. 

(147) 


148  CENTRAL  RAILROAD  OF  NEW  JERSEY 

The  road  operates  610  miles  of  railway,  the  most  important  part 
of  which  extends  from  Jersey  City  through  eastern  Pennsylvania  to 
Scranton  in  the  anthracite  coal  regions.  Another  important  division 
extends  southward  centrally  through  New  Jersey  to  a  double  ter- 
minal on  Delaware  Bav.    About  one-half  of  the  road  is  double  track. 


Ownership. 

As  the  Reading  owns  a  clear  control  of  the  road,  the  director- 
ate is  made  up  in  the  Reading  interest,  four  of  the  nine  directors 
being  also  directors  of  the  Reading,  including  George  F.  Baer, 
president ;  H.  McK.  Twombly,  representing  the  Vanderbilt  interests ; 
Charles  Steele,  representing  the  Morgan  interests,  and  Joseph  S. 
Harris,  of  Philadelphia.  The  other  directors  are:  J.  Rogers  Max- 
well, chairman  of  the  executive  committee,  also  a  director  in  the 
Lackawanna ;  Robert  W.  de  Forest,  vice-president  and  general 
counsel ;  George  F.  Baker,  and  Harris  C.  Fahnestock,  of  the  First 
National  Bank,  New  York;  and  Eben  B.  Thomas,  president  of  the 
Lehigh  Valley  Railroad. 

As  illustrating  the  closeness  with  which  the  anthracite  coai 
properties  of  the  United  States  are  held,  it  is  to  be  noted  of  the 
Central  of  New  Jersey  directors,  four  are  also  directors  in  the  Le- 
high Valley  and  another  the  president  of  that  road ;  four  are  also  in 
the  Lackawanna ;  three  are  also  directors  in  the  Erie,  which  in  turn 
owns  the  New  York,  Susquehanna  and  Western. 

The  Central  of  New  Jersey  owns  $1,600,000  par  value  of  the 
Lehigh  Valley  stock,  which  added  to  the  $1,000,000  of  stock  held  by 
the  Reading,  makes  up  $2,600,000.  This  compares  with  $5,700,000 
held  by  the  Lake  Shore.  In  other  words,  the  Central  of  Jersey  is  a 
link  in  the  Vanderbilt-Morgan-Standard  Oil-Pennsylvania  com- 
munity of  interest  scheme  which  controls  the  anthracite  coal  industry. 

Capitalization. 

It  will  be  seen  from  the  following  table  that  the  nominal  capi- 
talization represents  but  a  slight  part  of  the  Central's  actual  capital- 
isation. This  is  due  to  the  fact  that  it  pays  in  rentals  and  guarantees 
on  the  bonds  of  subsidiary  companies  a  larger  sum  than  it  pays  in 
interest  on  its  funded  debt.  Capitalizing  these  rentals  and  guaran- 
tees at  4%,  the  capital  account  of  the  road  on  June  30th,  1906, 
would  stand  as  follows : 


CENTRAL  RAILROAD  OF  NEW  JERSEY  149 

Common   stock $27,431,800 

Funded   debt 50,935,000 

Total  capital $78,366,800 

Rentals  capit.  at  4% 62,832,500 

Approx.  gross  capital $141,199,300 

Securities   held 23,347,400 

Approx.  net  capital $117,851,900 

Approx.  net  capitalization  per  mile.  .      $192,800 

Average   miles   operated 610 

Net  earnings  on  net  capitalization.  . .  .  8.4% 

Stock  on  net  capitalization 23% 

Fixed  Charges  on  total  net  income.  . .  50% 

Factor  of   Safety 50% 

It  will  be  seen  that  the  estimated  net  capitalization  of  the  road 
per  mile  is  very  high ;  higher,  indeed,  than  that  of  any  of  the  other 
large  eastern  roads.  The  estimate  of  $192,800  compares  with 
similar  estimates  of  $161,742  for  the  Reading;  $55,788  for  the  Le- 
high Valley;  $132,789  for  the  Lackawanna;  and  $145,000  for  the 
Pennsylvania. 

When  this  capitalization  is  compared  with  the  net  earnings  the 
latter  show  8.4%,  as  against  10.8%  for  the  Reading;  13.7%  for 
the  Lackawanna;  15.5%  for  the  Lehigh  Valley;  and  8.1%  for  the 
Pennsylvania.  On  the  basis  of  net  earnings,  therefore,  the  capi- 
talization does  not  appear  excessive. 

Much  the  larger  part  of  this  capitalization  was  in  the  form  of 
interest-bearing  debt,  or  its  equivalent,  the  stock  amounting  to 
only  one-fourth  the  estimated  net  capitalization. 

On  account  of  the  high  earnings,  however,  the  Fixed  Charges 
consume  only  one-half  of  the  Total  Net  Income,  leaving  a  wide 
margin  of  safety  for  the  underlying  securities. 

Equities  Owned. 

The  chief  holdings  of  the  Central  comprise  $8,352,900  par 
value  of  stock  in  the  Lehigh  and  Wilkesbarre  Coal  Company.  This 
is  against  a  total  outstanding  issue  of  $9,212,500  of  capital  stock, 
or  more  than  90%.  In  addition  to  this  the  Central  holds  income 
and  mortgage  bonds  of  the  Coal  Company  to  the  amount  of  $1J,- 
189,388  par  value. 


150  CENTRAL  RAILROAD  OF  NEW  JERSEY 

At  the  latest  estimates  the  Lehigh  and  Wilkesbarre  Coal  Com- 
pany held  13,600  acres  of  anthracite  coal  lands,  with  an  estimated 
quantity  of  335,000,000  tons  of  unmined  coal.  If  this  coal  could 
be  mined  at  an  average  profit  of  30  cents  per  ton,  which  is  about  the 
figure  for  the  estimated  earnings  of  the  Philadelphia  and  Reading 
Coal  Company,  this  would  give  a  valuation  to  this  property  of 
around  $100,000,000,  so  that  the  Central's  share  in  the  property  at 
this  valuation  would  more  than  pay  off  the  company's  funded  debt, 
and  leave  the  road  free  to  the  stockholders.  Of  course,  the  cash 
valuation  could  be  nothing  like  this,  but  even  if  it  were  no  more  than 
one-third  of  this  estimate,  the  Central's  share  in  the  property  would 
amount  to  more  than  thirty  millions  of  dollars. 

In  1905,  after  expending  $870,000  for  improvements  and 
charging  off  $226,000  for  depletion  of  coal  lands,  and  $146,000  in 
other  sinking  fund  charges,  the  coal  company  showed  a  net  profit  of 
$625,000.  This,  however,  was  carried  to  profit  and  loss,  and  was 
not  distributed  to  the  shareholders. 

The  Central's  equity  in  the  undistributed  earnings  of  the  Coal 
Company  is  undoubtedly  considerable  and  perhaps  in  excess  of  half 
a  million  dollars  per  annum. 

The  next  most  valuable  treasury  asset  is  the  $1,600,000  par 
value  in  the  stock  of  the  Lehigh  Valley,  paying  in  1906  only  4%, 
but  easily  earning  twice  this. 

The  company  had  in  its  treasury  $1,362,000  of  its  own  equip- 
ment bonds,  and  $1,116,000  of  its  general  mortgage  4  per  cents. 

The  total  of  securities  owned  was  carried  on  the  books  at  a 
valuation  of  $23,447,382  and  the  income  on  these  amounted  to  nearly 
5%.  This  on  a  4%  basis  of  valuation  shows  that  the  securities  were 
carried  at  considerably  below  their  cash  value. 

Increase  of  Capitalization. 
Within  the  six  and  a  half  years  from  1900,  the  funded  debt  of 
the  company  has  shown  but  a  slight  increase  and  the  stock  none  at 
all;  while  in  the  same  period  gross  earnings  have  increased  33%. 
The  items  are  as  follows : 


Year 


1900 
1905-6 


Common  Stock     Funded  Debt       Total  Capital     Gross  Earnings 


$27, 213,800  S46.5S6.100  873,799,900  $] 5,853,062 

27,431,800  50,935,000  78,366,800  20,523,030 


Increase  over  six  and  a  half  years:  Total  capital,  7%;  gro^- 
earnings,  33%. 


CENTRAL  RAILROAD  OF  NEW  JERSEY 


151 


Character  of  Traffic. 

For  years  the  character  of  the  Central's  traffic  has  been 
steadily  changing.  For  a  long  time  prior  to  1900  the  earnings  from 
coal  carried  exceeded  the  earnings  from  merchandise  freight.  In 
1900  they  were  just  about  equal;  in  1906  the  revenue  from  mer- 
chandise was  $8,671,000,  and  from  coal  traffic  $7,462,000.  The  coal 
receipts  showed  a  slight  decrease  from  the  previous  year,  due  to  the 
labor  troubles  in  the  spring  of  1906,  but  it  will  be  seen  that  even 
with  this  the  merchandise  traffic  is  steadily  growing  upon  the  coal 
traffic. 

So  are  the  passenger  earnings.  The  latter  averaged  around 
three  million  dollars  annually  from  1890  to  1900.  In  1906  they  had 
risen  to  nearly  four  million  dollars.  In  other  words,  the  sources  of 
the  Central's  earnings  are  broadening,  and  it  is  becoming  less  and 
less  dependent  singly  upon  the  coal  industry  for  its  prosperity. 
Nevertheless  it  derives  more  than  35%  of  its  gross  earnings  from 
its  coal  traffic,  and  is,  therefore,  still  vitally  sensitive  to  conditions  in 
tbis  industry. 

Stability  of  Earnings. 

In  the  ten  years  since  1897  the  gross  earnings  have  very 
nearly  doubled,  while  the  mileage  has  slightly  decreased,  through 
the  surrender  of  small  branches.  Within  this  period  the  gross 
earnings  per  mile  have  risen  from  $17,907  to  $32,644.  In  the  fol- 
lowing table  the  earnings  from  the  New  York  and  Long  Branch 
and  "other  operations,"  are  not  included,  since  these  "other  oper- 
ations" are  not  further  distinguished.  In  1906  the  earnings  from 
this  source  added  over  $2,500,000  to  the  gross  earnings  of  the  "rail 
lines,"  bringing  the  total  of  the  gross  earnings  of  the  company  for 
the  year  up  to  $23,101,089.  The  net  earnings  from  these  "other 
operations,"  amounting  to  $455,368  for  1906,  have  been  included 
in  the  total  net  income  of  the  company,  and  are  included  in  the 
surplus  shown. 


Year 

Miles  Operated 
646 

Gross  Earnings 
$11,568,328 

Per  Mile 

1897 

$17,907 

1898 

637 

11,505,847 

18,062 

1899 

640 

13,645,710 

21,321 

1900 

642 

13,975,646 

21,769 

1901 

639 

15,286,709 

23,922 

*1902-3 

639 

16,357,156 

25,598 

1903-4 

639 

18,421,952 

28,829 

1904-5 

602 

19,259,117 

31,991 

1905-6 

610 

20,523,130 

32,644 

Fiscal  year  changed  to  June  30. 


152  CENTRAL  RAILROAD  OF  NEW  JERSEY 

Maintenance. 

In  1902  the  fiscal  year  was  changed  to  June  30th.  In  the  fol- 
lowing table  no  account  is  given  of  the  expenditures  for  the  first 
six  months  of  1902. 


Traffic  Density 

Maintenance  per  Mile 

Total 

Year 

Way 

$2,131 
2,903 
2,705 
2,813 

2,850 

S2,680 

Equipment 

1901 

1902-3 

1903-4 

1904-5 

1905-6 

2,183,594 
2,377,162 
2,724,485 
3,077,570 
3,150,262 

$2,589 
3,455 
3,265 

3,754 
4,218 

$4,720 
6,358 
5,970 
6,567 
7,068 

Average 

2,702,614 

$3,456 

$6,136 

Miles  extra  main  track,  295. 


Lehigh  Valley. 
Lackawanna.... 
Erie 


Traffic  Density 


2,771,846 
3,079,629 
2,434,819 


Maintenance  per  Mile 


Way 


$2,588 
4,754 
1,861 


Equipment 


$3,429 
3,579 
3,216    £ 


Total 


$6,017 
8,333 
5,077 


It  will  be  seen  that  the  maintenance  charges  of  the  Central 
compare  favorably  with  those  of  the  Lehigh  Valley,  but  are  on  the 
average  25%  below  the  Lackawanna,  with  only  a  slightly  larger 
traffic  density.  The  Central's  maintenance  is  on  about  the  same 
scale  as  that  of  the  Reading;  that  is,  with  about  three  fourths  the 
freight  density,  its  expenses  per  mile  are  about  three-quarters 
as  large. 

The  expenditures  for  equipment  for  1906  were  sufficient 
to  allow  $1,727  per  locomotive;  $415  per  passenger  car,  and  $53 
per  freight  car.  The  item  for  locomotives  is  rather  low;  other- 
wise the  charges  are  fairly  liberal  and  probably  adequate.  It  is 
not  likely,  however,  that  any  great  amount  of  earnings  is  con- 
cealed here. 

Improvements. 

When  we  come  to  improvements,  no  such  large  items  are  to 
be  found  charged  off  from  earnings  as  in  the  Lackawanna, 
though  the  item  for  1906  was  considerable.  For  five  years  these 
special  appropriations  have  been  as  follows: 


CENTRAL  RAILROAD  OF  NEW  JERSEY  153 

1901  $540,000 

1903-4  1,665,146 

1904-5  2,679,702 

1905-6  3,373,798 

Total $8,258,646 

This  compares  with  similar  appropriations  of  $5,713,000  by 
the  Lehigh,  and  $16,934,000  by  the  Delaware  and  Lackawanna. 

In  1906,  these  special  appropriations  were  sufficient  to  add 
75%  to  the  nominal  maintenance  charges,  that  is  to  say  they  were 
sufficient  to  bring  up  the  total  amount  for  maintenance  and  im- 
provements for  1906  to  over  $12,000  per  mile. 

Surplus  Earnings. 

In  the  following  table  the  amounts  of  surplus  shown  are  be- 
fore the  special  appropriations  noted  above  have  been  charged 
off.  In  1906,  after  charging  off  $3,373,798  for  improvements, 
there  was  still  left  $2,286,000  of  net  surplus,  sufficient  for  the  full 
8%  dividend  and  a  small  surplus  to  Profit  and  Loss. 

In  other  words,  with  fair  maintenance  charges  the  road 
devoted  a  dollar  and  a  half  for  improvements  for  every  dollar  of 
dividends  paid.    This  is  an  excellent  showing. 


Year 

Surplus 

Percent  Earned 
on  Common 

Dividends  Paid 
on  Common 

Average  Price 

1900 

82,619,363 

9.7 

5 

'§182 

1901-2 

3,763,484 

13.9 

5 

171 

1902-3 

2,134,796 

7.9 

8 

181 

1903-4 

4,326,203 

16. 

8 

171 

1904-5 

5,032,422 

18.6 

8 

174 

1905-6 

5,659.603 

21. 

8 

212 

Dividend  Record. 

Prior  to  1889  dividends  on  the  Central  were  a  rare  event. 
Since  then,  however,  it  has  paid  steadily,  rising  in  the  last  four 
years  to  an  eight  per  cent,  basis.    The  record  is  as  follows: 

YEAR.  %  YEAR.  % 

1883  V/2  1890      ' 6 

1884  Ay2  1891       6y2 

1885-8  —  1892-4    7       yearly 

1889  3  ,  1895       Sy2 


154  CENTRAL  RAILROAD  OF  NEW  JERSEY 

YEAR.  %  YEAR.  % 

1896       5  1900-1    5       yearly 

1897       4y4  1902-7    8       yearly 

1898-9    4       yearly 

Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906,  the  road  showed : 

Current   assets $6,018,163 

Current    liabilities 5,968,913 


Leaving  a  balance  of $49,250 

There    was    due    in    dividends,    interest    and    taxes    accrued 
nearly  $2,000,000,   showing   that   with   regard   to   immediate   re- 
sources the  road  was  not  overly  well  supplied. 
The  item  of  cash  was  $1,138,643. 
The  balance  to  the  credit  of  profit  and  loss  was  $9,515,631. 

Investment  Value. 

From  a  road  that  formerly  journeyed  from  one  receivership 
to  another,  the  Central  has  risen  to  the  position  of  one  of  the 
solidest  companies  of  the  east,  and  few  securities  are  more  highly 
regarded. 

vSince  1900  the  stock  has  not  sold  below  $115  per  share,  and 
since  it  was  put  upon  an  8%  basis,  it  has  not  sold  below  $153 
per  share.  It  rose  to  a  record  figure  of  $239  in  May  of  1906. 
At  the  latter  price  the  yield  upon  the  stock  was  only  3.3%,  and 
the  price  was  evidently  boosted  to  this  figure  on  the  theory  of  a 
prospective  increase  in  dividend,  since  the  control  of  the  road 
is  owned  outright  and  the  floating  supply  can  be  of  no  value,  save 
as  an  investment.  With  money  ruling  between  5  and  7l/2%  in 
1906,  it  is  evident  that  as  an  investment  there  were  many  more 
attractive  issues. 

There  is  at  least  one  consideration  that  would  weigh  heavily 
against  the  disposition  to  increase  an  already  high  dividend  rate. 
That  is  the  widespread  notion  that  the  anthracite  coal  roads  are 
earning  a  great  deal  more  money  than  they  have  any  right  to, 
and  a  further  increase  in  the  dividend  might  readily  stir  up  a 
lively  agitation  for  a  reduction  in  freight  rates.  The  rates  on  the 
Central  have  never  been  low,  and  they  are  still  high,  the  aver- 
age rate  per  ton  per  mile  amounting  to  about  .84c.  for  1906.  This, 
considering  the  enormous  coal  traffic  of  the  Central  means  a  high 
average  rate  for  coal  carriage. 


CENTRAL  RAILROAD  OF  NEW  JERSEY  155 

Earnings  compared,  there  was  undoubtedly  a  better  basis  for 
an  increased  dividend  on  the  Central  than,  for  example,  on  the 
Pennsylvania ;  but  it  must  be  remembered  that  the  Pennsylvania 
has  stood  on  a  6%  basis,  and  that  an  increase  from  this  does  not 
mean  so  much  in  the  public  mind  as  an  increase  from  8%. 

In  the  very  moderate  decline  of  1906,  the  stock  sold  down 
to  $204  per  share.  On  this  basis  it  is  about  a  4%  stock,  earning 
on  an  average  more  than  twice  its  dividend,  with  a  steadily 
growing  traffic,  and  an  enormous  indeterminate  holding  of  coal 
lands.  In  the  general  slump  of  March,  1907,  the  stock  sold  down 
to  $165.  Purchased  somewhere  between  this  and  $200,  it  would 
probably  yield  the  investor  a  fair  interest  upon  his  money,  with  a 
steady  increment. in  the  value  of  his  holding  from  year  to  year. 


CHESAPEAKE   AND   OHIO   RAILWAY. 

The  Chesapeake  and  Ohio  is  one  of  the  leading  "soft  coal- 
ers," whose  chief  business  is  the  carriage  of  bituminous  coal 
from  the  fields  of  West  Virginia  and  Virginia  to  tide-water. 
Throughout  its  entire  length  it  is  to  all  intents  paralleled  by  the 
Norfolk  and  Western,  and  this  paralleling  is  very  closely  pur- 
sued alike  in  their  gross  earnings,  character  and  development  of 
traffic,  ownership  and  management. 

Both  these  roads  are  in  turn  being  paralleled  by  the  new 
Deepwater  and  Tidewater  Railroad,  which,  so  it  is  understood, 
Mr.  H.  H.  Rogers,  of  the  Standard  Oil  Co.,  is  building  from  the 
Pocahontas  coal  fields  to  Norfolk,  Va. 

History. 

The  Chesapeake  and  Ohio  came  into  existence  in  1868,  with 
the  merger  of  the  Virginia  Central  and  Richmond  and  Covington 
Railroads.  The  Virginia  Central  was  one  of  the  first  railways  in 
the  United  States,  having  been  chartered  as  far  back  as  1836,  but 
its  completion  was  delayed  in  one  way  and  another  until  1867. 
Soon  after  the  consolidation  the  company  defaulted  its  interest 
and  efforts  towards  readjustment  proving  futile,  it  finally  went 
into  the  hands  of  a  receiver  in  1875.  It  was  then  reorganized  into 
the  present  company,  in  1878,  under  the  control  of  the  late  C.  P. 
Huntington.  The  road  did  not  prosper  under  the  Huntington 
management,  and  it  was  allowed  to  deteriorate,  so  that  its  inter- 
est payments  were  again  defaulted  and  a  second  reorganization, 
this  time  without  foreclosure,  was  carried  out  under  the  auspices 
of  Drexel,  Morgan  and  Company,  when  Vanderbilt  and  Morgan 
interests  gained  control  of  the  road. 

From  this  omvard  its  progress  was  steady.  The  road  was 
extended  westward  to  Cincinnati,  the  Richmond  and  Allegheny 
was  absorbed  in  1890,  and  another  small  road  in  1892.  Owing  to 
continuous  freight  wars,  however,  the  road  was  not  prosperous, 
and  its  average  rates  fell  steadily  to  1899.  In  the  following  year, 
in  carrying  out  the  Community  of  Interest  idea  inaugurated  by 

(156) 


CHESAPEAKE  &  OHIO  157 

Mr.  Cassatt  of  the  Pennsylvania,  the  latter  road  made  large  pur- 
chases of  its  stock,  so  as  to  obtain,  with  the  Vanderbilt  interest, 
a  controlling  interest  in  the  Chesapeake.  Since  this  time  its 
earnings  have  grown  very  rapidly,  the  average  of  its  freight  rates 
has  been  raised,  and  the  road  has  risen  to  a  highly  prosperous 
condition.  With  the  absorption  of  some  smaller  lines,  its 
operated  mileage  in  1906  reached  1,826  miles,  and  with  the  track- 
age of  other  lines  used  jointly,  in  1906,  the  road  had  233  miles  of 
second  track. 

Ownership. 

On  July  1st,  1905,  the  New  York  Central  owned  stock  repre- 
senting an  outlay  of  $1,638,445,  and  the  Big  Four  of  $2,453,569. 
At  the  same  time  the  Pennsylvania  Railroad  proper  owned  $10.- 
130,000  par  value  of  the  stock,  the  Pennsylvania  Company,  $4,- 
000,000,  and  the  Northern  Central,  $1,500,000  par  value,  a  total 
for  the  Pennsylvania  interest  of  $15,630,000  par  value.  The  New 
York  Central  stock  was  purchased  when  the  stock  was  held 
at  a  very  low  figure,  and  it  is  understood  that  these  holdings 
with  the  Pennsylvania's  constituted  a  controlling  interest  in  the 
road.  The  Pennsylvania  stock  was  disposed  of  in  the  Fall  of 
1906  to  the  banking  firm  of  Kuhn,  Loeb  &  Co. 

Under  the  former  regime,  the  directorate  was  divided  be- 
tween the  two  controlling  interests,  the  Pennsylvania  being  rep- 
resented on  the  board  by  its  three  vice-presidents,  John  P.  Green, 
Samuel  Rea,  and  John  B.  Thayer.  The  New  York  Central  had 
also  three  directors:  William  H.  Newman,  president  of  the  New 
York  Central,  Chauncey  M.  Depew,  and  H.  McK.  Twombly. 
The  other  directors  were  George  W.  Stevens,  president,  and  Decatur 
Axtell,  vice-president  of  the  Chesapeake  and  Ohio;  and  Henry  T. 
Wickham,  of  Richmond,  Ya.,  a  long  time  director  of  the  road. 

In  1905  the  Chesapeake  and  Ohio  •  reported  1,478  stockhold- 
ers, and  in  1906  the  minority  interest,  representing  about  $18,- 
000,000  par  value  of  the  capital  stock,  was  organized  by  Messrs. 
Scott  &  Stringfellow,  of  Richmond,  Va.,  for  the  purpose  of 
securing  an  increase  in  the  dividend  rate. 

Up  to  1906  the  controlling  interest  in  the  Norfolk  and  West- 
ern was  owned  by  the  Pennsylvania,  so  that  the  chief  competitor 
of  the  Chesapeake  and  Ohio  was  under  practically  the  same  own- 
ership. At  its  western  terminals,  the  road  operates  in  close 
traffic   arrangements   with   the   Vanderbilt   and    Pennsylvania    lines 


158  CHESAPEAKE  &  OHIO 

and  especially  the  Big  Four,  and  it  is  jointly  interested  with  the 
latter  in  the  Louisville  and  Jeffersonville  Bridge. 

The  Chesapeake  and  Ohio  owns  a  one-sixth  interest  in  the 
majority  of  the  common  stock  of  the  Hocking  Valley  Railway, 
and  it  is  also  joint  guarantor  with  five  other  roads  in  the  bonds 
of  the  Richmond-Washington  line. 

Capitalization. 

On  June  30th,  1906,  the  capitalization  of  the  road  stood  as 
follows : 

Com.   stock $62,790,700 

1st    Preferred 7.700 

2nd     Preferred 700 

Total  stock $62,799,100 

Funded    debt 86,680,354 

Due   on    Equipment 9,824,666 

Nominal  capital $159,304,120 

Rentals  cap.  at  4% 7,792,500 

Approximate  gross  capitalization. .  .$167,096,620 
Securities  held 28,692,489 

Approx.  net  capitalization $138,404,131 

Approx.  net  cap.  per  mile $77,142 

Miles     operated 1,794 

Net  earnings  on  net  capital 7.0% 

Stock    on    net    capital 45% 

Fixed  Charges  on  total  net  income.  53% 

Factor  of  Safety 47% 

It  will  be  seen  that  the  estimated  capitalization  per  mile  is 
considerably  below  that  of  the  Norfolk  and  Western,  its  %77,- 
142  per  mile  standing  against  $96,108  per  mile  for  its  competitor. 
Likewise  the  Chesapeake  and  Ohio  shows  a  slightly  higher  per 
centage  of  net  earnings  on  the  estimated  net  capitalization,  its 
figure  of  7%  standing  against  6.4%  for  the  Norfolk  and  Western. 
On  the  other  hand  a  smaller  percentage  of  its  capitalization  is 
represented  by  stock,  its  45%  standing  against  52%  for  the  Nor- 
folk   and    Western.      Similarly    fixed    charges    consume    a   higher 


CHESAPEAKE  &  OHIO  159 

percentage  of  the  total  net  income,  the  fixed  charges  for  1906 
consuming  53%  as  against  37%  for  the  Norfolk  and  Western. 
The  Factor  of  Safety  for  the  underlying  securities  of  the  Chesa- 
peake and  Ohio  is  therefore  considerably  less  than  that  of  its 
competitor. 

During  the  fiscal  year  of  1906,  the  road  purchased  the  entire 
capital  stock  and  property  of  the  Coal  River  Railway,  including 
eighteen  miles  of  completed  road  and  extensions  under  away, 
amounting  to  about  50  miles,  in  order  to  develop  valuable  coal 
properties.  The  road  will  guarantee  $3,000,000  of  bonds  of  this 
road. 

In  the  same  year  the  stock  of  the  Western  Pocahontas  Cor- 
poration was  purchased  at  a  price  of  $250,000,  the  road  guaran- 
teeing in  addition  $750,000  of  bonds.  This  purchase  carried  with 
it  control  of  about  30,000  acres  of  coal  and  timber  land. 

Equities  Owned. 

The  $34,177,000  par  value  of  securities  owned  is  carried  on 
the  books  of  the  company  at  a  valuation  of  $28,692,489.  The 
company  does  not  itemize  its  Other  Income,  but  the  total 
amount  received  from  other  sources  than  earnings  in  1906, 
amounted  to  only  $204,352,  which  represents  less  than  one  per 
cent,  on  the  valuation  of  the  securities  held  in  the  treasury.  By 
far  the  larger  part  of  these  securities  were  the  stocks  and  bonds  of 
the  Chesapeake  and  Ohio  Railway  Company  of  Kentucky,  the 
parent  road  holding  a  par  value  of  slightly  over  $25,000,000, 
equally  divided  between  stocks  and  bonds. 

Of  the  remainder  the  most  notable  items  were  $3,500,000 
of  the  bonds  of  the  Covington,  Cincinnati  and  Eastern  Railroad, 
and  $1,500,000  of  its  stock;  and  $1,154,000  par  value  of  the  Hock- 
ing Valley  common  stock,  representing  one-sixth  interest  in  the 
control  of  the  road.  The  road  is  interested  in  and  guarantees  the 
bonds  of  the  Norfolk  Terminal  and  Transportation  Company, 
the  Chesapeake  Grain  Elevator  Company,  the  Passenger  and  Belt 
Railway  Company,  and  the  Chesapeake  Steamship  Company, 
Limited.    None  of  these  guarantees  is  of  large  amount. 

Both  the  Grain  Elevator  Company  and  the  steamship  line 
were  run  at  a  small  nominal  loss.  In  1905  the  railway  company's 
interest  in  the  steamship  company  was  sold  to  the  minority 
stockholders  in  England  under  a  contract  to  add  additional 
steamers  and  continue  the  service  for  a  term  of  years.     From 


160 


CHESAPEAKE  &  OHIO 


this  sale  $400,000  was  derived,  which  was  invested  in  five  hundred 
box  cars.  Through  this  sale  the  company  ceased  its  purchase  of 
the  steamer  company's  debentures  to  which  it  was  obligated  and 
on  which  it  paid  in  1905,  $48,835. 

None  of  its  holdings  represent  equities  of  any  considerable 
value. 

Increase  of  Capitalization. 

The  capitalization  of  the  Chesapeake  and  Ohio,  even  under 
the  reorganization  of  1888  was  heavy  and  the  road  has  been 
handicapped  on  this  account  and  had  to  grow  up  to  its  capitali- 
zation through  the  steady  increase  of  business. 

Neglecting  a  very  small  amount  of  preferred  stock,  the  items 
stand  as  follows : 


Year 

Common  Stock 

Funded  Debt 
md  Equipment 

Total 

Gross  Earnings 

1899-0 
1905-6 

$60,527,800 
62,790,700 

$70,844,608 
96,505,020 

s 13 1,386,408 
159,295,720 

$13,402,070 
24,602,988 

Increase  over  six  years:  Total  capitalization,  21%;  gross 
earnings,  83%. 

The  increase  of  capitalization  has  been  divided  between  the 
extension  of  the  road,  for  new  construction,  or  the  purchase  of 
smaller  lines,  and  the  purchase  of  new  equipment.  Since  1900, 
the  road  has  added  about  350  miles  of  main  line  and  a  consider- 
able amount  of  second  track. 

Character  of  Traffic. 

Carriage  of  bituminous  coal  makes  up  57%  of  the  tonnage 
of  the  road  and  coal  and  coke  together  over  60%.  The  next 
largest  item  is  lumber,  amounting  to  nearly  11%,  and  the  rest 
of  the  traffic  is  evenly  distributed  over  various  items.  The  car- 
riage of  grain  and  other  mill  products  amounted  to  only  a  little 
over  4%. 

Contrary  to  many  other  roads,  the  coal  tonnage  of  the 
Chesapeake  and  Ohio  has  increased  very  much  more  rapidly  than 
its  other  freight.  Since  1899  coal  tonnage  has  more  than  doubled 
while  the  general  business  of  the  company  has  increased  a  little 
more  than  a  quarter.  In  other  words,  the  road  is  becoming  more 
and  more  dependent  upon  the  prosperity  of  a  single  industry. 


CHESAPEAKE  &  OHIO 
Stability  of  Earnings. 


161 


Like  the  Norfolk  and  Western,  the  gross  earnings  of  the 
road  have  shown  astonishing  development  since  1896,  but  of  the* 
two,  the  Norfolk  and  Western  has  increased  considerably  faster. 
The  gross  earnings  of  the  latter  rose  in  this  period  from  $10,900,- 
000  to  $28,500,000,  while  the  Chesapeake's  earnings  rose  from 
about  the  same  figure  to  only  $24,500,000.  There  was  a  still 
more  striking  discrepancy  in  the  earnings  per  mile.  These  for 
the  Norfolk  and  Western  in  1896  were  $6,946  per  mile  as  against 
$7,575  for  the  Chesapeake  and  Ohio ;  while  in  1906  the  figure  for 
the  Norfolk  and  Western  was  $15,373  as  against  $13,714  for  the 
Chesapeake.  The  mileage  and  earnings  for  the  Chesapeake  and 
Ohio  through  these  years  stand  as  follows: 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1895-6 

1,360 

$10,221,131 

$7,575 

1896-7 

1,360 

10,708,133 

7,873 

1897-8 

1,360 

11,788,557 

8,668 

1898-9 

1,445 

12,009,839 

8,311 

1899-0 

1,476 

13,402,070 

9,080 

1900-1 

1,506 

15,371,541 

10,206 

1901-2 

1,618 

16,524,379 

10,212 

1902-3 

1  637 

16,711,602 

10,208 

1903-4 

1,651 

19,297, 525 

11,688 

1904-5 

1,672 

20,724,371 

12,395 

1905-6 

1,794 

24,602, 988 

13,714 

Though  the  earnings  of  the  road  have  increased  heavily 
within  this  period,  a  considerable  part  of  this  prosperous  show- 
ing is  due  to  an  increase  in  rates.  In  1899,  the  bedrock  year  for 
all  the  roads  of  the  country,  and  likewise  for  the  Chesapeake  and 
Ohio,  the  average  rate  per  ton  per  mile  had  declined  to  .36c.  In 
1906,  the  average  rate  was  .42c,  an  increase  of  .6  mills.  In 
reality  the  rise  in  rate's  was  considerably  greater  than  this,  since 
the  average  earnings  of  the  coal  tonnage  in  1906  was  only  .32c. 
as  against  .58c.  for  ordinary  merchandise  traffic,  and  as  already 
noted  the  coal  tonnage  has  been  increasing  about  four  times  as 
fast  as  its  other  traffic.  It  follows,  therefore  that  the  rates  must 
be  materially  higher  than  in  1899  in  order  to  bring  up  the  aver- 
age freight  rates  to  .42c. 

The  increase  in  the  average  freight  rate  from  1899  repre- 
sents upwards  of  $2,700,000  in  the  gross  earnings  for  1906;  that 
u 


162 


CHESAPEAKE  &  OHIO 


is  to  say,  maintenance  and  other  charges  remaining  the  same, 
more  than  half  the  entire  surplus  for  1906  would  have  been 
wiped  out  had  the  freight  rates  of  1899  been  still  in  force,  and 
so  would  the  entire  average  surplus  for  the  six  years  under  view. 

What  the  Community  of  Interest  plan  has  enabled  this  and 
other  roads  to  do  is  to  materially  increase  its  rates,  spend  very 
much  higher  sums  annually  for  maintenance  and  improvements, 
and  still  show  a  comfortable  surplus  at  the  close  of  the  year. 
Stated  in  other  terms,  since  1899,  the  gross  tonnage  of  the  road 
has  increased  63%,  while  its  freight  earnings  have  increased  77%. 

The  astonishing  increase  in  tonnage  in  1906  will  hardly  es- 
cape the  attention  of  the  investor,  amounting  as  it  did  to  23% 
or  nearly  one  quarter  of  the  total  traffic  of  the  road.  This  increase 
was  altogether  abnormal  and  it  is  scarcely  possible  that  anything 
like  this  rate  of  increase  could  be  maintained  for  any  length 
of  time. 

Maintenance. 

The  maintenance  for  a  period  of  six  years  has  been  as  follows : 


Traffic  Density 

Maintenance  per  Mile 

Total 

Year 

Way 

Equipment 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

2,026,013 
1,974,250 
1,606,899 
1,917,441 
2,244,776 
2,575,392 

$1,472 
1,345 
1,331 
1,397 
1,309 
1,471 

$1,496 
1,703 
1,636 
2,216 
2,432 
2,491 

$1,995 

$2,968 
3,048 
2,967 
3,613 
3,741 
3,962 

Average 

2,057,510 

$1,387 

$3,382 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

B    &  O 

2,282,704 
2,190,314 

SI, 876 
1,563 

12,416 
1,903 

$4,292 

Norfolk  &  West... 

3,466 

The  average  traffic  density  through  this  period  was  about 
the  same  with  the  Norfolk  and  Western  as  with  the  Chesapeake 
and  Ohio,  and  their  average  expenditure  per  mile  was  likewise 
about  the  same,  but  in  1901  the  average  expenditure  for  mainten- 
ance was  $270  per  mile  higher  on  the  Chesapeake  than  on  the 
Norfolk,  while  in  1906  it  was  $460  per  mile  less.  In  other  words 
the  maintenance  charges  on  the  Norfolk  road  have  risen  very 


CHESAPEAKE  &  OHIO  163 

much  more  rapidly  than  on  the  Chesapeake,  and  had  the  Chesa- 
peake been  maintained  in  1906  on  the  same  scale  as  the  Norfolk, 
this  would  have  added  upwards  of  $800,000  to  its  maintenance 
and  reduced  the  surplus  shown  by  a  corresponding  amount. 

The   report   of  the   company   itemises   the     maintenance    and 
equipment  and  the  sums  in  1906  amounted  to  an  average  of  $2,- 
114  per  locomotive  in  service,  $1,090  per  passenger  car,  and  $92 
per  freight  car  in  service.     These  were  about  the  same  charges 
as  in   1905,  while  the  maintenance  of  way  was  about  $160  per 
mile    higher.      This    increase    in    no    wise    corresponds    to    the 
astonishing  increase  of  tonnage  in  1906,  and  it  is  therefore  doubt- 
ful if  the  items  of  maintenance  for  1906  conceal  any  considerable 
sum  of  earnings.     It  is  evident  moreover,  that  with  a  competing 
road  with  almost  identically  the  same  territory  and  traffic,  spending 
four  or  five  hundred  dollars  per  mile  more  on  its  maintenance, 
the    Chesapeake     would    hardly    be    in    a  position    to    reduce    its 
charges  and  still  keep  its  property  up  to  the  competitive  stand- 
ard.    Reference  to  the  table  of  the  traffic  density  for  the  Norfolk 
and  Western  will  show  that  the  latter  likewise  had  a  quite  abnor- 
mal increase  of  traffic  for  the  year,  but  at  the  same  time  the  Nor- 
folk and  Western  added  $425  per  mile  of  road  to  its  maintenance 
charges,  while  the  Chesapeake  and  Ohio  added  only  about  $229 
per  mile.    All  this  has  a  very  material  bearing  upon  the  question 
of  increased  dividends  for  the  Chesapeake. 

Improvements. 

In  addition  to  the  regular  charges  for  maintenance  consider- 
able sums  have  been  set  aside  from  the  surplus  earnings  for  im- 
provements. The  items  which  follow  include  $450,000  in  1904  and 
$735,000  in  1905  for  principal  of  equipment  trusts : 

1900-1    $1,304,172 

1901-2   1,440,815 

1902-3   591,012 

1903-4   1,311,366 

1904-5   1,052,477 

1905-6  2,522,739 

Total $8,222,581 

In  the  appropriations  for  1906  $988,333  was  payment  on  the 
principal  of  equipment  trusts,  and  $1,534,406  for  improvements  and 
new  equipment. 


164 


CHESAPEAKE  &  OHIO 


The  total  of  $8,322,581  for  the  six  years  compares  with  $16,- 
220,001  for  the  Norfolk  and  Western.  In  other  words,  with  about 
the  same  average  traffic  density,  and  with  slightly  lower  average 
maintenance  charges,  the  Chesapeake  and  Ohio  has  set  aside  from 
its  earnings  nearly  $8,000,000  less  than  its  chief  comeptitor. 

Surplus  Earnings. 

With  its  liberal  scale  of  maintenance  charges,  the  nominal  sur- 
plus shown  by  the  Chesapeake  and  Ohio  up  to  1906  has  been  rela- 
tively small.    The  figures  for  six  years  have  been  as  follows : 


Per  cent. 

Dividends 

Average 
Price 

Year 

Surplus 

Earned  on 

Paid  on 

Common 

Common 

1900-1 

$2,001,897 

3.3 

1 

44 

1901-2 

2,060,409 

3.4 

1 

48 

1902-3 

1,269,604 

2.1 

1 

40 

1903-4 

1,944,511 

3.1 

1 

37 

1904-5 

2,871,639 

4.6 

1 

53 

1905-G 

4,607,223 

7.3 

1 

58 

This  represents  an  average  surplus  of  $2,500,000.  On  about 
the  same  scale  of  maintenance  charges  the  Norfolk  and  Western 
was  able  to  show  in  the  same  period  an  average  surplus  of  about 
$5,700,000,  or  more  than  twice  that  of  the  Chesapeake  and  Ohio. 
This  was  due  in  part  to  a  more  rapid  increase  in  the  gross  earnings, 
and  in  part  to  the  fact  that  Fixed  Charges  on  the  Norfolk  consume 
a  lower  percentage  of  total  net  income  than  on  the  Chesapeake. 

It  will  be  noted  that  the  increase  in  the  surplus  shown  for  1906 
was  very  heavy,  amounting  to  nearly  $2,000,000  more  than  the  pre- 
vious year.  As  already  explained  this  was  in  part  accomplished  by 
only  a  very  slight  rise  in  the  total  of  the  maintenance  charges  per 
mile,  as  against  a  very  astonishing  increase  of  nearly  25%  in  the 
total  tonnage  of  the  road,  and  as  against  an  increase  of  a  full  15% 
in  the  traffic  density.  Had  the  increase  in  the  maintenance  charges 
been  directly  proportioned  to  the  increase  in  traffic  density,  mainte- 
nance would  have  been  $561  per  mile  higher  than  in  1905,  or  $340 
more  than  it  actually  was,  and  $340  per  mile  on  the  total  mileage  of 
the  road  would  have  added  about  $600,000  to  the  maintenance 
charges. 

Furthermore  it  has  already  been  noted  that  with  but  a  slightly 
higher  traffic  density,  the  maintenance  charges  on  the  Norfolk  and 
Western  were  $460  more  on  the  Norfolk  than  on  the  Chesapeake  in 
1906.    Either  way  it  may  be  regarded,  therefore,  the  surplus  shown 


CHESAPEAKE  &  OHIO  165 

by  the  Chesapeake  in  1906  would  have  been  between  $600,000  to 
$800,000  less  had  its  own  standard  of  maintenance  in  1905  or  that  of 
its  chief  competitor  in  1906  been  equalled. 

The  Balance  Sheet. 

The  balance  sheet  at  the  close  of  the  fiscal  year  of  1906  did  not 
show  the  company  in  very  good  position  as  to  working  capital. 

The  current  assets  show $4,741,611 

Current   liabilities 4,650,672 

Leaving  a  working  balance  of $90,939 

In  addition  to  the  ordinary  current  liabilities,  there  was  an  item 
of  bills  payable  amounting  to  $2,045,000.  It  will  be  seen,  therefore, 
that  the  company  was  in  need  of  working  capital. 

The  item  of  cash  was  $1,523,951.  The  amount  to  credit  of 
Profit  and  Loss  was  very  small,  amounting  with  the  1906  addition 
of  $1,005,000,  to  only  $1,534,713.  The  fact  that  the  surplus  shown 
was  so  small,  combined  with  the  need  of  working  capital  has  been 
a  factor  militating  against  any  increase  of  dividend. 

Investment  Value. 

Since  1899  a  one  per  cent,  dividend  has  been  paid  annually  upon 
the  capital  stock,  and  these  are  all  the  dividends  that  have  ever  been 
paid  by  the  company  save  the  very  slight  amount  paid  upon  the  pre- 
ferred stock.  In  1906  the  minority  holders  combined  to  urge  upon 
the  management  an  increase  of  this  dividend,  adducing  in  favor  of 
this  a  series  of  very  attractive  figures  and  pointing  especially  to  the 
high  earnings  of  the  year. 

But  if  the  surplus  shown  since  1901  be  averaged,  the  yearly 
amounts  represented  only  3.8%  on  the  capital  stock.  It  will  be  seen, 
therefore,  that  the  percentage  of  7.3  shown  in  1906  was  quite  be- 
yond the  normal,  and  this  high  percentage  was  due,  as  already  ex- 
plained, to  a  very  abnormal  increase  in  the  traffic  of  the  road,  with  a 
rather  small  increase  in  the  maintenance  charges  for  the  year. 

If  the  average  for  the  six  years  had  been  equally  divided  be- 
tween dividends  and  improvements,  according  to  the  traditional 
Pennsylvania  policy,  the  road  would  have  paid  only  1^2%  as  against 
1%  actually  paid. 

The  maintenance  charges  since  the  advent  of  the  Pennsylvania 
influence  have  been  considerably  increased  and  are  undoubtedly 
liberal,  and  in  addition  to  this,  appropriations  for  improvements  have 
not  been  niggardly.  This  policy  of  improvement  has  resulted  in  a 
very  heavy  increase  in  earnings  in  the  face  of  a  rather  small  in- 


166  CHESAPEAKE  &  OHIO 

crease  in  the  capital,  and  undoubtedly  the  Chesapeake  and  Ohio  is  in 
a  position  at  least  to  double  its  dividend  if  not  more. 

The  Chesapeake  &  Ohio  had  obvious  need  of  funds  to  take  care 
of  the  remarkable  growth  of  its  business,  but  conditions  of  1906-7 
were  not  propitious  for  the  sale  of  bonds ;  it  is  too  much  over- 
capitalized to  sell  its  stock  and  it  was  this  situation  which  undoubt- 
edly was  decisive  in  the  management's  refusal  to  increase  the  divi- 
dend rate.  It  was  to  be  assumed  that  the  necessary  temporary 
financing  would  be  by  means  of  short  time  notes  and  that  with  the 
return  of  more  normal  bond  conditions,  funds  would  be  provided  by 
further  bond  issues.  If  this  were  done  on  reasonable  terms,  the 
dividend  rate  might  readily  be  increased  to  perhaps  3%. 

The  future  of  the  stock  will  be  very  materially  influenced  by  the 
disposition  of  the  Pennsylvania's  holdings,  sold  to  Messrs.  Kuhn, 
Loeb  &  Co.  The  latter  are  known  to  be  closely  associated  with  the 
Standard  Oil  interests  in  many  enterprises,  and  the}  were  also  pur- 
chasers of  half  of  the  Pennsylvania's  holdings  in  the  Norfolk  & 
Western.  In  turn,  the  Deepwater  &  Tidewater,  paralleling  both 
these  roads,  is  the  creation  of  Mr.  H.  H.  Rogers,  and  in  the  minds 
of  some  this  suggested  that  in  one  fashion  or  other  a  holding  com- 
pany might  take  over  an  interest  in  all  three  roads,  insuring  a  large 
degree  of  harmony  in  their  management.  This  holding  company 
might  readily  be  the  Union  Pacific,  which  has  also  large  holdings  in 
the  Baltimore  &  Ohio,  in  which  case  the  soft  coal  industry  of  the 
East  would  come  very  largely  under  a  single  control. 

In  any  event  it  is  certain  that  the  Chesapeake  &  Ohio  is  earning 
much  more  than  its  1%  dividend,  and  in  anticipation  of  an  in- 
creased rate  in  1906  the  stock  was  run  up  to  $65  per  share.  It  re- 
ceded to  $32  a  few  months  later  in  the  general  decline  in  prices. 
It  might  readily  go  lower,  but  purchased  at  anything  like  the  latter 
figures  it  should  certainly  show  large  profit  for  a  long  pull. 


CHICAGO  AND  ALTON  RAILROAD. 

The  "Alton"  as  it  is  familiarly  known,  is  one  of  the  inter- 
mediate roads  of  the  interior  which,  by  reason  of  its  strategic 
advantages,  has  always  occupied  an  exceptional  position  among 
western  railroads.  It  operates  the  most  direct  line  between 
Chicago  and  St.  Louis,  with  another  extending  to  Kansas  City, 
and  numerous  branches  throughout  central  Illinois.  It  is  not 
a  large  road,  has  been  but  little  extended  in  many  years,  and 
still  operates  less  than  a  thousand  miles.  But  it  has  been  within 
recent  years  immensely  improved,  so  that  it  is  now  one  of  the 
best  equipped  properties  in  the  middle  territory.  The  new  man- 
agement dates  from  1899,  since  which  time  the  policy  and  char- 
acter of  the  road  have  been  considerably  altered. 

Previous  to  this  time  the  Alton  had  occupied  a  position  of  ex- 
ceptional independence,  and  was  long  a  tower  of  financial  strength 
among  western  roads ;  furthermore,  by  reason  of  its  aggressive 
management  a  thorn  in  the  sides  of  its  competitors.  This  was 
under  the  old  Blackstone  management  which  for  years  directed 
the  destinies  of  the  Alton,  carrying  it  through  the  heavy  depres- 
sion of  1893-7,  with  apparently  tremendous  success,  and  main- 
taining its  old  high  rate  of  dividends  while  the  dividends  of  other 
roads  were  passed,  or  sharply  cut,  or  the  roads  themselves  passed 
into  bankruptcy.  The  stock  was  quoted  at  high  figures,  and 
coveted  by  investors. 

In  1899,  control  of  the  property  was  purchased  by  a  syndi- 
cate headed  by  E.  H.  Harriman,  Geo.  J.  Gould,  James  Stillman 
and  Kuhn,  Loeb  &  Co.  It  was  found  that  the  road  was  in  need 
of  new  equipment,  of  reconstruction,  and  in  fact  of  almost  every- 
thing that  goes  to  the  making  of  a  fine  railroad  property.  It 
had  largely  to  be  rebuilt.  To  do  this  a  heavy  issue  of  new 
securities  was  required,  and  in  1900  the  affairs  of  the  com- 
pany were  reorganized  through  the  creation  of  the  Chicago  and 
Alton  Railway  Company,  which  leased  the  road  for  a  period  of 
99  years,  at  the  same  time  acquiring  practically  all  of  the  stock 

(167) 


168  CHICAGO  &  ALTON 

of  the  old  road.  The  latter  was  exchanged  for  the  stock  of  the 
new  company,  which  had  an  authorized  capital  of  $20,000,000 
of  preferred  and  $20,000,000  of  common  stock. 

In  1906  these  two  companies  were  consolidated  into  the  new 
Chicago  and  Alton  Railroad  Company,  with  practically  the  same 
capitalization  as  the  Railway  company.  Under  the  new  arrange- 
ment the  stockholders  of  the  railway  company  exchanged  their 
stock,  share  for  share  for  the  preferred  and  common  of  the  new 
railroad  company,  while  the  few  remaining  shareholders  of  the 
old  railroad  company,  the  original  Alton,  were  given  the  oppor- 
tunity to  exchange  their  stock  for  cumulative  4%  prior  lien  and 
participating  stock  of  the  new  company,  of  a  total  issue  of  8,993 
shares.  The  road  is  henceforth  to  be  operated  by  the  new  com- 
pany without  the  former  complications  of  leases,  the  maintenance 
of  two  sets  of  books  and  so  forth. 

During  1906  about  55  miles  of  new  trackage  heretofore 
operated  by  the  Quincy,  Carrolton  and  St.  Louis,  brought 
up  the  total  operated  mileage  to  970  miles.  Besides  this  there 
were  126  miles  of  additional  main  track,  while  other  lines,  jointly 
operated  with  the  Big  Four  and  the  Atchison,  bring  up  the 
practical  total  of  double  track  to  over  200  miles. 

Ownership. 

In  1904-5  when  the  Alton  seemed  solidly  established  under 
Union  Pacific  management,  it  was  announced  that  interests  con- 
nected with  the  Rock  Island  had  purchased  very  near  the  control, 
the  purchase  being  one  of  the  memorable  "coups"  of  the  "Street". 
It  turned  out  that  the  Harriman-Union  Pacific  interests  owned 
but  little  more  than  a  quarter  of  the  total  stock.  The  Rock 
Island  interests  did  not  however,  appear  to  have  absolute  control, 
and  the  prospective  struggle  for  supremacy  was  avoided  through 
the  formation  of  a  voting  trust  in  which  the  stock  held  by  the 
Rock  Island,  the  Union  Pacific,  and  some  other  interests  were 
joined.  The  amount  acquired  by  the  Rock  Island  was  $4,470,000 
par  value  of  the  preferred  and  $14,320,000  par  value  of  the  com- 
mon, constituting  slightly  less  than  a  majority.  On  June  30th, 
1906.  the  Union  Pacific  owned  $10,343,100  par  value  of  the  pre- 
ferred. In  June,  1907,  the  voting  trust  agreement  was  abrogated 
and  the  road  passed  entirely  under  Rock  Island  control. 

Under  this  arrangement  the  directorate  of  1906,  was  ma/le  up 
as  follows:  W.  II.  Moore,  James  II.  Moore,  D.  G.  Reid,  Robert 


CHICAGO  &  ALTON  169 

Mather  and  B.  F.  Yoakum,  and  John  J.  Mitchell,  president  of 
the  Illinois  Trust  Company,  representing  the  Rock  Island ;  E. 
H.  Harriman  and  James  Stillman,  representing  the  Union  Pacific ; 
James  B.  Forgan,  president  of  the  First  National  Bank  of  Chi- 
cago; S.  M.  Felton,  president  of  the  Alton;  Norman  B.  Ream, 
also  a  director  in  the  Burlington,  the  Erie,  the  Baltimore  and 
Ohio  and  other  roads. 

In  1906,  Benj.  F.  Yoakum,  at  the  head  of  the  Rock  Island- 
'Frisco  System,  was  elected  chairman  of  the  executive  com- 
mittee, succeeding  E.  H.  Harriman. 

In  Aug.,  1907,  it  was  announced  that  the  Rock  Island's  interest, 
somewhat  larger  than  had  appeared  from  the  published  reports,  and 
carrying  entire  control,  had  been  disposed  of  to  the  Toledo,  St.  L.  & 
Western  (the  "Clover  Leaf")  collateral  trust  bonds  being  issued  in 
exchange  for  the  stock.  The  relations  of  the  Rock  Island  and  the 
Hawley  group  of  roads  had  been  growing  closer,  and  the  transfer 
of  the  Alton  was  taken  to  indicate  a  further  extension  of  this 
alliance. 

Despite  the  fact  that  the  control  of  the  road  has  been  so 
greatly  sought,  the  stock  is  still  apparently  widely  distributed, 
the  road  reporting  in  1905  2,039  shareholders.  This  stock  is 
closely  held  and  the  floating  supply  is  small. 

Capitalization. 

On  June  30th,  1906,  the  capitalization  of  the  road  stood  as 
follows : 

Common    stock $19,542,800 

Preferred  stock 

Non.  cum.  4% 19,544,000 

Cum.  4%  prior  lien 899,300 

Total    stock $39,986,100 

Funded   debt    (net) $64,350,000 

Guaranteed    stocks 3,693,200 

Equip.    Notes 3,016,918 

Total    capital $111,046,218 

Average  capitalization  per  mile $114,480 


170  CHICAGO  &  ALTON 

Average   miles   operated 970 

Net  earnings  on  net  capitalization.  .  . .  3.7% 

Stock  on  net  capitalization 36% 

Fixed  Charges  on  total  net  income....  73% 

Factor  of  Safety 27% 

Of  the  funded  debt,  $8,000,000  of  the  refunding  bonds  are 
held  by  the  road  itself,  $7,000,000  of  these  being  deposited  as 
security  for  the  $5,000,000  of  collateral  trust  notes,  and  the 
balance  in  the  treasury  of  the  company.  This  $8,000,000  has  been 
excluded  from  the  table  and  the  funded  debt  given  is  net.  The 
securities  held  by  the  company  are  not  separately  itemized,  but 
from  the  income  account  it  appears  that  the  $8,000,000  of  bonds 
noted  above  is  the  only  item  of  importance. 

Beyond  the  interest  on  guaranteed  stocks,  the  amount  paid 
in  rentals  of  the  leased  lines  is  small,  and  as  the  face  value  of 
these  stocks  is  included  in  the  estimate  of  capitalization  given 
above,  this  item  is  not  further  considered. 

It  will  be  seen  that  the  capitalization  of  the  road  for  a 
middle  west  line  is  very  high,  amounting  to  $114,480  per  mile. 
The  Alton  is  essentially  a  main  track  road,  with  branch  lines 
of  comparatively  small  amount,  and  on  this  account  its  mileage 
capitalization  would  be  much  higher  than  large  lines  like  the 
Burlington,  the  Rock  Island  or  the  North  Western,  occupying 
much  the  same  character  of  territory,  but  having  a  much  larger 
proportion  of  branch  mileage. 

Nevertheless,  even  with  this  reservation,  it  will  be  seen  that 
the  capitalization  is  very  high,  since  the  net  earnings  on  this 
capitalization  represent  only  3.7%,  as  against  10.5%  for  the 
North  Western,  and  9.7%  for  the  St.  Paul.  Moreover,  a  large 
part  of  the  capitalization  is  fixed  interest  debt,  the  stock  represen- 
ting only  36%  of  the  total  capitalization. 

Still  further  evidencing  the  high  capitalization  is  the  fact 
that  the  Fixed  Charges  consumed  in  1906  73%  of  the  total  net 
income.  This  left  a  Factor  of  Safety  for  the  underlying  securi- 
ties and  guarantees  of  only  27%.  On  a  road  of  other  than  the 
stable  earnings  of  the  Alton  and  its  close  association  with  two 
great  systems,  affording  assurance  of  steady  business,  this  per- 
centage would  be  dangerously  low.  As  a  matter  of  fact  the  road 
is  in  excellent  condition  and  despite  the  large  amounts  consumed 
by  Fixed  Charges,  its  securities  enjoy  a  fair  degree  of  confidence. 


CHICAGO  &  ALTON  171 

Since  the  Alton's  holdings  of  other  securities  are  relatively 
small,  it  has  no  valuable  equities  in  other  roads. 

Increase  of  Capitalization. 

Since  the  organization  of  the  new  Railway  company  in  1899, 
there  has  been  no  increase  in  the  capital  stock  save  the  new 
issue  of  cumulative  4%  prior  lien  stock  already  noted.  Since 
1^02  the  fixed  interest  debt  has  increased  about  $13,000,000,  or 
about  25%.  In  the  same  period  the  increase  of  tonnage  has 
about  corresponded  with  the  increase  in  the  debt.  The  increase 
in  gross  earnings  has  been  rather  less  than  this,  due  to  the  re- 
duction in  the  average  freight  rate  received.  For  five  years 
the  items  compare  as  follows : 

Voo  Common        Preferred    !  Funded  debt!       Total  Gross 

iear  Stock  Stock        and  guaran-;      Capital  Earnings 

teed  Stock 


1900-1   $19,542,000  $19,544,000  $54,000,000   $93,086,000   $9,036,655 
1905-6    19,542,000   20,443,300   71,060,118   111,045,418  1  11,586,094 

1  I I  1 , 

Increase  over  five  years :  Total  capital,  19% ;  gross  earn- 
ings, 28%. 

Character  of  Traffic. 

The  Alton  does  not  separately  itemize  its  tonnage,  but  the 
report  of  1906  shows  that  46%  of  its  tonnage  is  from  the  car- 
riage of  coal.  This  item  has  very  considerably  increased  within 
six  years,  and  the  revenue  accordingly,  but  the  rate  received 
from  this  class  of  business  is  low,  since  the  total  revenue  derived 
from  this  source  constituted  only  15%  of  the  gross  earnings  of 
the  road. 

Passenger  earnings  are  large,  the  passenger  revenue  amoun- 
ting to  about  28%  of  the  total. 

Stability  of  Earnings. 

Within  many  years  the  mileage  of  the  road  has  remained 
very  nearly  the  same,  the  total  increase  in  ten  years  amounting 
to  only  126  miles.  In  the  same  period  the  gross  earnings  have 
risen  from  $6,673,000  to  $11,586,000. 

The  figures  of  1896-7,  however,  were  those  of  a  period  when 
the  Alton's  earnings  had  heavily  declined.  Under  the  old  Black- 
stone  management,  in  1892,  the  grossearnings  per  mile  amounted 
to  $9,166,  a  level  that  was  not  regained  until  eight  years  later. 


172 


CHICAGO  &  ALTON 


Since  the  new  management  took  hold  in  1899,  the  receipts  per 
mile  have  increased  from  $9,118  in  1900,  to  $11,940  in  1906,  an 
increase  of  a  little  over  30%.    The  items  by  years  are  as  follows: 


Year 

Miles  Operated 
844 

Gross  Earnings 

Per  Mile 

1896-7 

$6,673,605 

$7,911 

1897-8 

844 

6,286,569 

7,542 

1898-9 

856 

6,546,590 

7,765 

1899-0 

855 

7,796,449 

9,118 

1900-1 

919 

9,036,655 

9,826  - 

1901-2 

920 

9,225,739 

10,031 

1902-3 

915 

10,071,092 

11,001 

1903-4 

915 

11,425,853 

12,484 

1904-5 

915 

11,797,313 

12,890 

1905-6 

970 

11,586,094 

11,944 

It  will  be  seen  that  both  the  total  gross  earnings  and  the 
earnings  per  mile  were  higher  in  1905  than  in  1906.  This  was 
due  in  part  to  the  fact  that  in  1904-5  the  road  did  a  heavy  busi- 
ness in  connection  with  the  St.  Louis  Fair,  and  for  the  rest  to 
a  decline  in  the  average  freight  rate  received.  The  reduction  in 
the  rate  from  1905  was  from  .69c  to  .64c,  representing  a  difference 
in  the  year's  freight  business  of  over  $700,000  in  revenue. 

In  the  report  for  1906  President  Felton  called  attention  to 
the  fact  that  in  1898,  the  year  before  the  property  was  acquired 
by  the  present  management,  the  average  rate  per  ton  per  mile 
was,  .83c  as  compared  with  .64c  in  1906.  This  reduction  re- 
presented a  difference  on  the  year's  earnings  of  $2,248,000.  Presi- 
dent Felton  remarks  that  "from  this  it  would  appear  that  the 
benefits  derived  from  the  investment  of  a  large  amount  of  money 
in  the  property  have  accrued  mostly  to  the  public." 

The  decline  in  the  receipts  from  passenger  traffic  for  1906 
amounted  to  $775,000  from  the  previous  year. 

Maintenance. 


It  is  obvious  from  the  following  table,  that  with  a  traffic 
density  of  about  1,200,000  ton-miles  per  mile  of  road,  the  main- 
tenance charges  have  been  heavy,  and  especially  in  the  three  last 
years  shown,  when  the  amount  for  maintenance  was  nearly 
$3,000  per  mile. 

It  would  be  foolish,  however,  to  compare  this  maintenance 
with  the  maintenance  charges  of  great  systems  like  the  Rock 
Island,  the  Burlington  or  the  North  Western,  having  extensive 
mileage  through  thinly  settled  territory,  with  many  branch  lines 


CHICAGO  &  ALTON 


173 


on  which  the  traffic  density  is  very  low.  Considering  the  Alton's 
large  passenger  business  it  is  probable  that  these  amounts  are 
none  too  high,  in  comparison  with  the  standards  set  by  pros- 
perous roads  in  recent  years.  On  the  other  hand  it  is  evident 
that  the  sum  is  ample  and  that  in  case  of  need  these  charges 
might  perhaps  be  somewhat  reduced  without  affecting  the  con- 
dition of  the  road.    The  items  for  the  several  years  are  as  follows : 


Year 

Traffic  Density 

Maintenan 
Way 

;e  per  Mile 
Equipment 

Total 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

895,614 
981,245 
1,204,698 
1,201,854 
1,103,069 
1,210,611 

1,099,515 

$1,207 
1,042 
1,326 
1,580 
1,599 
1,471 

$1,371 

$956 
1,132 
1,301 
1,345 
1,459 
1,450 

$1,273 

$2,163 
2,174 
2,627 
2,925 
3,058 
2,921 

Average 

$2,644 

Louisv.  &  Nash. 
111.  Central 
Chic.  &  E.  111.  .1 

929,594 
1,180,351 
1,703,403 

$1,490 

1,386 

867 

$1,537 
1,486 
1,254 

$3,027 
2,872 
2,121 

Improvements. 

The  expenditures  for  improvements  since  the  advent  of  the 
new  management  have  been  very  heavy.  For  example  the  report 
of  1906  states  that  since  1899  the  total  tractive  power  of  loco- 
motives in  service  has  been  increased  132%  ;  the  total  capacity 
of  freight  cars,  145%  ;  and  correspondingly  large  amounts  have 
been  expended  on  the  roadbed,  on  new  bridges,  heavier  rails,  etc. 
The  expenditures  on  this  work  alone  for  the  three  years  ending 
July,  1903,  were  nearly  $13,000,000.  The  larger  part  of  this  work, 
however,  was  paid  for  by  the  issue  of  new  securities  and  not 
from  earnings. 

Surplus   Earnings. 

The  surplus  shown  in  six  years  has  been  as  follows : 


Dividends 

Per  cent. 

Year 

Surplus 

Paid  on 

Earned  On 

Average  Price 

Preferred 

Common 

(Calendar  Years) 

1900-1 

$1,149,742 

4 

1.8 

36 

1901-2 

825,341 

4 

38 

1902-3 

880,769 

4 



37 

1903-4 

1,324,146 

4 

2.7 

27 

1904-5 

1,602,385 

4 

4.1 

40 

1905-6 

1,009,980 

4 

1.1 

37 

174  CHICAGO  &  ALTON 

The  decrease  in  the  surplus  in  1906  results  from  the  decline 
of  nearly  $1,000  per  mile  in  the  gross  earnings,  the  reason  of 
which  has  been  already  stated. 

Dividend  Record. 

In  former  days  the  Alton  was  one  of  the  great  dividend 
payers,  the  record  for  thirty  years  back  standing  as  follows: 

Year.  Preferred.  Common. 

1877 7y2  7y2 

1878 7  7 

1879 7  6 

1880 7  6]/2 

1881-3 8   yearly  8  yearly 

1884 10  10 

1885-96 8  yearly  8  yearly 

1897 7y  7yA 

Chicago  and  Alton  Raihvay 

1901-6 4 

Since  the  retirement  of  the  old  management,  and  the  re- 
organization of  the  company,  the  only  dividends  paid  have  been 
the  4%  to  which  the  preferred  is  limited.  These  have  been  paid 
since  1901  continuously. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906  the  balance  sheet 
showed : 

Current  assets    $2,411,538 

Current  liabilities    3,283,941 


Leaving  a  debit  balance  of $872,403 

The  company,  however,  held  in  its  treasury  $1,000,000  of 
its  own  bonds,  carried  on  the  books  at  a  valuation  of  $800,000, 
and  inasmuch  as  this  item  has  not  been  considered  in  the 
estimate  of  capitalization,  it  is  not  included  here.  Deducting 
this  sum  from  the  amount  shown  on  the  balance  sheet,  as  has 
here  been  done,  it  will  be  seen  that  the  company  was  in  need 
of  working  capital,  and  that  a  current  credit  balance  was  secured 
only  by  including  these  bonds,  an  item  which  is  not  usually 
carried  among  assets. 


CHICAGO  &  ALTON  175 

The  item  of  cash  amounted  to  $1,441,263,  and  the  balance 
to  the  credit  of  profit  and  loss  was  extremely  small,  amounting 
only  to  $261,390. 

Investment  Value. 

The  heavy  proportion  of  fixed  charges  which  must  be  paid 
out  of  the  total  net  income  of  the  road  leaves  but  a  relatively 
small  surplus,  the  amount  shown  in  1906  representing  less  than 
10%  of  the  gross  earnings.  This  is  barely  sufficient  to  pay  the 
4%  on  the  preferred  stock,  and  leaves  nothing  at  all  for  the 
common.  In  the  six  years  under  view  the  preferred  dividends 
have  practically  exhausted  all  the  available  surplus,  a  fact 
which  is  evidenced  by  the  small  amount  carried  to  the  credit  of 
Profit  and  Loss. 

It  is  true  that  this  has  been  in  the  face  of,  and  is  doubtless 
to  some  extent  the  result  of,  heavy  maintenance  charges;  yet 
it  could  scarcely  be  maintained  that  the  Alton's  maintenance 
charges  could  be  cut  down  by  a  thousand  dollars  per  mile, 
and  something  like  this  heavy  reduction  would  have  been  required 
to  justify  any  dividends  on  the  common  stock. 

The  heavy  increase  in  fixed  charges  has  practically  con- 
sumed all  the  increase  in  gross  earnings,  and  at  the  end  of  six 
very  prosperous  years  for  the  rest  of  the  country,  the  road  is 
without  any  considerable  assets  in  its  treasury.  Furthermore 
the  benefits  in  the  decreased  cost  of  transportation  resulting  from 
the  heavy  improvements  have  been  fully  offset  by  the  decline  in 
the  average  freight  rate.  The  largest  single  item  of  growth 
has  been  the  coal  traffic,  which  is  a  low  grade  business. 

At  the  present  time,  therefore,  the  prospects  for  dividends 
on  the  common  stock  do  not  seem  very  assuring,  and  hardly 
sufficient  to  justify  the  considerable  price  at  which  this  stock 
has  ruled.  Quotations  of  $47  per  share  in  1904  were  occasioned 
rather  by  efforts  to  acquire  control  of  the  road  than  from  any 
investment  value  which  the  stock  might  have.  The  common 
sold  as  low  as  $18  per  share  in  1903,  but  in  1906  its  average 
price  was  above  30.  In  March,  1907  it  sold  at  $15.  If  the  hold- 
ings of  the  Rock  Island  and  affiliated  interests  are  sufficient  to 
ensure  absolute  control,  the  rest  of  this  stock  is  worth  such  a 
figure  only  to  speculators  counting  upon  a  manipulative  rise. 
On  account  of  the  pecular  position  of  the  road  the  quotations  for 


176  CHICAGO  &  ALTON 

the  stock  are  apt  to  be  higher  than  otherwise  they  might,  so 
that,  purchased  at  somewhere  near  the  low  figures  of  1907,  the 
stock  might  readily  yield  a  profit  to  the  purchaser  who  was 
willing  to  wait  for  a  turn  in  the  market.  But  there  are  many 
stocks  whose  increase  in  earnings  in  recent  years  afford  a  much 
more  solid  basis  for  investment  than  the  Alton. 

As  a  4%  stock  with  a  six  years  record,  the  preferred  might 
reasonably  sell  around  $75  per  share,  with  money  ruling  at  4%. 
In  general,  the  quotations  in  the  last  six  years  have  ruled  con- 
siderably below  this,  the  stock  declining  to  $60  per  share  in 
1903,  and  showing  its  highest  price  of  $85  per  share  at  the  time 
of  the  Rock  Island's  heavy  purchases  in  1904.  In  1906  the 
stock  reached  $80  per  share  only  during  the  January  rise  and  in 
March,  1907  it  sold  at  $62.  Limited  to  4%,  the  stock  has  no 
further  prospects  and  is  of  value  only  for  control  or  as  an  in- 
vestment. If  control  is  already  securely  lodged,  it  is  then  simply 
a  4%  stock,  showing  a  rather  meagre  margin  of  safety  for  its 
dividends.  At  1906  rates  for  money,  it  was  scarcely  worth 
1906  prices. 


CHICAGO  AND  EASTERN  ILLINOIS  RAILROAD. 

The  Chicago  &  Eastern  Illinois  is  a  subsidiary  and  virtually 
a  part  of  the  St.  Louis  &  San  Francisco  system,  which  is,  in 
turn,  a  part  of  the  Rock  Island  System.  All  of  the  common 
stock  and  $6,050,400  of  the  preferred  stock  is  owned  by  the  St. 
Louis  &  San  Francisco,  leaving  only  $2,780,300  (preferred)  of 
the  stock  of  the  company  in  the  hands  of  the  public.  The  road 
is  operated  separately  but  has  the  same  general  directorate  and 
executive  committee  as  the  rest  of  the  Rock  Island  system. 

The  road  operates  a  line  extending  from  Chicago  to  Terre 
Haute  and  another  line  from  Woodland  to  Thebes  and  Joppa  in 
Southern  Illinois.    In  1906  it  operated  948  miles. 

Securities  outstanding  were  as  follows  : 

Capital  Stock, 

Common    $7,217,800 

Preferred    8,830,700 

Total  Stock $16,048,500 

Funded  Debt 33,462,000 

Equipment  Notes  &  Bonds   9,832,520 

Total  Capital $59,343,020 

Per  Mile $62,598 

For  the  fiscial  year  of  1906,  the  road  showed: 

Gross  Earnings  of $9,928,562 

Net  Earnings 3,358,073 

Other  Income 316,418 

Total  Net  Income 3,674,492 

Fixed    Charges 2,529,534 

Six  per  cent,  was  paid  on  the  preferred  and  8%  on  the  common, 
consuming  practically  all  the  surplus  income. 

The  traffic  density  and  maintenance  charges  for  a  period  of 
six  years  compared  as  follows : 
12  (177) 


178 


CHICAGO  &  EASTERN   ILLINOIS 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way            Equipment 

1900-1  

1901-2 

1902-3  

1903-4 

1904-5 

1905-6 

1,275,619 
1,502,253 
1,879,744 
2,046,188 
1,691,214 
1,825,403 

$870 
837 
889 
882 
861 
864 

$     842 
1,011 
1,158 
1,585 
1,399 
1,533 

$1,712 
1,848 
2,047 
2,467 
2,260 
2,397 

Average .  . 

1,703,403 

$  867 

$1,254 

$2,121 

Chic.  &  Alton.. 
Ills.  Central  .  . 
Louis.  &  Nash. 

1,099,515 

1,180,351 

929,594 

$1,371 
1,386 
1,490 

$1,273 
1,486 
1,537 

$2,644 
2,872 
3,02/ 

It  will  be  seen  that  with  a  traffic  density  two-thirds  greater 
than  the  Chicago  &  Alton  or  the  Illinois  Central  or  the 
Louisville  &  Nashville,  the  average  maintenance  charges  on  the 
Chicago  &  Eastern  Illinois  were  from  $500  to  $900  per  mile  less. 
\\  nile  the  maintenance  charges  on  the  three  roads  used  for 
comparison  were  undoubtedly  very  liberal  and  concealed  some 
earnings,  yet  the  difference  in  traffic  density  considered,  it  would 
have  seemed  as  if  the  charges  on  the  Chicago  &  Eastern  Illinois 
should  have  been  at  least  equal  to  those  of  the  Chicago  &  Alton. 
In  other  words,  the  road  would  have  charged  itself  on  the  average 
at  least  $500  per  mile  more  than  it  did.  In  all  probability,,  the 
property  could  hardly  have  been  maintained  at  the  level  of  the 
other  roads  without  an  even  greater  excess  charge. 

The  difference  of  $500  per  mile  would  amount  on  the  average 
to  in  the  neighborhood  of  half  a  million  dollars  per  annum.  In 
other  words,  the  nominal  surplus  shown  in  1906  would  have 
reduced  by  nearly  half,  that  .is  to  say,  it  would  have  almost 
wiped  out  the  amount  of  surplus  available  for  dividends  on  the 
common  stock. 

In  August  of  1902,  the  St.  Louis  &  San  Francisco  gave  in 
exchange  for  the  common  and  preferred  its  stock  trust  certi- 
ficates at  the  rate  of  $100  thereof  for  each  $100  share.  The 
holding  company  has  the  option  to  retire  these  trust  certificates 
at  any  time  for  $250  for  each  $100  common  stock  trust  certfi- 
cate.  In  1905  a  majority  of  the  common  stock  certificates  were 
exchanged  for  these  certificates,  in  denominations  of  $1,000 
each,  representing  four  shares  of  common  stock  and  bearing  4% 
interest. 


CHICAGO  &  EASTERN  ILLINOIS  179 

The  stock  owned  by  the  St.  Louis  &  San  Francisco  is  car- 
ried on  its  books  at  a  valuation  of  $18,239,237  for  the  preferred 
and  $9,321,550  for  the  common.  It  would  seem  as  if  this  was  an 
enormous  over-valuation  for  these  securities. 


CHICAGO  AND  NORTH  WESTERN   RAILWAY. 

A  very  pretty  story  is  told  by  Frank  Spearman  in  his  book, 
''The  Strategy  of  the  Railroads,"  concerning  an  eastern  railway 
engineer  out  hunting  and  lost  in  the  wilds  of  northern  Wisconsin, 
who  suspicioned  that  he  was  not  quite  right  in  his  senses  as  he 
broke  from  a  dense  forest  upon  a  right  of  way  of  double-track  100 
lb.  heavy  ballasted  railway,  and  saw  monstrous  trains  of  cars  go 
thundering  by.  The  road  in  question  was  the  Chicago  and  North 
Western  and  nothing  can  better  illustrate  its  character. 

It  holds  in  the  middle  west  something  of  the  same  position 
as  the  New  York  Central  in  the  East.  It  is  one  of  the  oldest 
roads  west  of  the  Alleghenies,  and  has  behind  it  a  proud  record 
of  nearly  fifty  years  of  fine  management  and  financial  success. 

History. 

The  beginnings  of  the  North  Western,  as  it  is  familiarly  known, 
go  back  to  1836,  when  the  Galena  and  Chicago  Union  was 
chartered.  In  1850  the  line  from  Chicago  to  Elgin  was  completed. 
The  same  people  built  the  Chicago,  Milwaukee  and  Fond  du 
Lac.  Both  companies  succumbed  in  the  crash  of  1857,  and  out 
of  the  wreck  came  the  Chicago  and  North  Western.  The  line 
had  been  carried  through  to  the  Mississippi  in  1855,  and  to  the 
Missouri  by  1867.  Since  then  the  line  has  grown  steadily,  some- 
times by  absorption  of  smaller  roads ;  usually,  however,  by  new 
construction,  until  in  1906,  it  embraced  a  total  of  7,453  miles  of 
operated  road,  of  which  all  but  about  one  hundred  miles  was 
owned  outright  by  the  company.  It  had  also  861  miles  of  addi- 
tional main  track. 

Besides  this,  the  North  Western  owns  a  working  control  in 
the  Chicago,  St.  Paul,  Minneapolis  and  Omaha,  and  the  latter 
is  a  homogeneous  part  of  the  system.  The  1,683  miles  of  the 
Omaha  bring  the  total  line  operated  up  to  9,116  miles. 

The  North  Western  extends  from  Chicago  westward  through 
the  rich  corn  fields  of  Iowa,  and  into  eastern  Nebraska,  and 
westerly  from  Omaha  and  Sioux  City  to  Caspar  in  Wyoming, 
and  to  Deadwood  in  the  Black  Hills.     Another  great  trunk  line 

(ISO) 


CHICAGO  &  NORTH  WESTERN  181 

carries  the  road  through  southern  Minnesota  and  South  Dakota; 
yet  another  northward  from  Chicago  through  Wisconsin  to  the 
great  iron  districts  of  the  Michigan  peninsular.  The  subsidiary 
St.  Paul  and  Omaha  line  carries  the  system  to  Duluth,  to  Min- 
neapolis and  St.  Paul,  and  from  thence  to  Sioux  City  and  Omaha. 
In  August,  1906  the  directors  voted  to  double  the  capital 
stock  of  the  road,  increasing  it  to  $200,000,000,  so  that  it  may 
be  assumed  that  the  aggressive  policy  of  the  North  Western  will 
in  no  ways  be  changed. 

Ownership. 

Though  the  North  Western  does  not  form  a  part  of  the 
New  York  Central  system,  it  is  spoken  of  always  as  a  Vander- 
bilt  line,  and  the  ownership  of  the  road  is  much  the  same. 
Whether  or  not  the  Vanderbilt  interests  own  the  absolute  control 
of  the  stock,  it  is  known  they  hold  always  a  sufficient  number 
of  proxies  to  control  the  directorate.  The  latter  includes  W.  K. 
Vanderbilt,  F.  W.  Vanderbilt,  H.  McK.  Twombly,  Chauncey  M. 
Depew,  and  Samuel  P.  Barger,  all  of  the  New  York  Central 
directorate ;  and  James  Stillman,  also  of  the  New  York  Central, 
but  representing  the  Standard  Oil  interests :  Albert  Keep,  long 
president  of  the  road,  and  later  chairman  of  the  board;  Marvin 
Hughitt,  the  present  president,  Chauncey  Keep,  of  Chicago,  and 
James  C.  Fargo,  president  of  the  American  Express  and  the 
Merchants  Transportation  Company.  All  of  these  are  closely 
associated  with  the  Vanderbilt  interests. 

The  balance  of  the  board  was  made  up  of  H.  C.  Frick,  of 
Pittsburgh,  and  Oliver  Ames  and  David  P.  Kimball,  of  Boston, 
Zenas  Crane,  of  Dalton,  Mass,  Byron  L.  Smith  and  Cyrus  H. 
McCormick  of  Chicago,  and  Frank  Work  of  New  York,  also  a 
director  of  the  Lackawanna. 

Messrs.  Frick,  Ames,  Stillman  and  Hughitt  are  also 
directors  of  the  Union  Pacific.  The  executive  committee  shows 
very  clearly  the  Vanderbilt  control  of  the  road.  The  stock  of 
the  Northwestern  is  extensively  held,  the  road  reporting  to  the 
Interstate  Commerce  Commission  4,109  shareholders  in  1905. 

Affiliations. 

As  one  of  the  Vanderbilt  lines,  the  North  Western  is  practi- 
ally  the  westerly  end  of  the  New  York  Central-Lake  Shore 
system,  and  the  working  connections  between   these  roads  are 


182  CHICAGO  &  NORTH  WESTERN 

close.  Almost  equally  close  are  the  North  Western's  affiliations 
with  the  Union  Pacific,  though  in  this  regard  it  divides  with  its 
rival,  the  Chicago,  Milwaukee  and  St.  Paul,  which  has  latterly 
shown  closer  connections  with  the  Union  Pacific  than  formerly. 

Should  the  Union  Pacific  gain  practical  control  of  the  St. 
Paul,  the  North  Western's  close  connection  with  the  Union 
Pacific  might  be  considerably  altered,  especially  should  the  North 
Western  be  extended  to  the  Pacific  Coast. 


Capitalization. 

On  June  30th,  1906,  the  capital  account  of  the  road  stood  as 
follows : 

Common    stock    $75,182,742 

Preferred  stock    22,395,120 

Total   $97,577,862 

Funded  Debt    164,214,000 

Total    Capital $261,791,862 

Securities  held   37,393,831 

(Inc.     Co.'s    own    stocks     &    bonds     in 
treasury.) 

Approx.  net  capital $224,398,031 

Approx.  net  capitalization  per  mile $30,257 

Miles  operated    7,428 

Net  earnings  on  net  capital 10.5% 

Stock  on  net  capital 43% 

Fixed  Charges  on  total  net  income 39% 

Factor  of  safety   61  % 

It  will  be  seen  that  the  capitalization  per  mile  of  the  North 
Western,  as  compared  with  most  eastern  roads  is  very  low.  It 
is,  for  example,  about  one-fourth  that  of  the  New  York  Central. 

The  capitalization  is  not  only  low  when  reduced  to  a  mile- 
age basis,  but  also  upon  the  basis  of  net  earnings.  The  net 
earnings  for  1906  showed  10.5%  on  the  estimated  net  capitaliza- 
tion, which  amount  is  about  twice  that  of  the  New  York  Central. 


CHICAGO  &  NORTH  WESTERN 
Equities  Owned. 


183 


The  only  extensive  equity  held  by  the  North  Western  lies  in 
its  interest  in  the  Chicago,  St.  Paul,  Minneapolis  and  Omaha, 
owning  $5,380,000  out  of  $11,259,911  preferred  stock,  and  $9,- 
320,000  out  of  $18,558,953  of  common  stock.  This  amounts 
practically  to  absolute  control.  The  $14,700,000  stock  is  carried 
on  the  books  at  $10,000,000.  It  is  paying  at  the  present  time 
7%  and  earning  a  considerable  surplus  over  and  above  this  sum. 
A  solid  7%  stock  under  such  conditions,  would  represent  a  value 
of  around  $170  per  share,  so  that  this  stock  holding  is  readily 
worth  two  and  a  half  times  its  book  cost  and  represents  an  asset 
of  perhaps  $25,000,000. 

The  balance  of  the  securities  held  by  the  North  Western  are 
mainly  its  own  stocks  and  bonds,  or  those  of  subsidiary  lines. 


Style  of  Capitalization. 

Even  if  we  deduct  from  the  Funded  Debt  the  total  valuation 
of  the  securities  held  in  the  treasury,  the  bonded  debt  predomi- 
nates in  the  capitalization,  the  stock  representing  only  43%  of 
the  estimated  net. 

In  1906,  Fixed  Charges,  however,  consumed  only  39%  of  the 
total  net  income,  so  that  the  margin  of  safety  was  equivalent  to 
61%.  The  amount  of  the  preferred  is  comparatively  not  large, 
and  the  present  7%  dividends  only  consume  a  little  over  6% 
more  of  the  net  earnings,  so  that  the  margin  of  safety  for  the 
preferred  was  about  55%. 


Increase  of  Capitalization. 

The  items  of  increase  through  six  years  have  been  as  follows  : 


Year 


Common 
Stock 


Preferred 

Stock 
(7  percent.) 


Funded 
Debt 


1899-00     $41,448,365 
1905-6  75,182,742 


$22,398,954  $137,187,500 
22,395,1201;    164,214,000 


Total 


$201,024,819 
261,791,862 


Gross 
Earnings 


$42,950,805 
63,481,578 


It   will   be   seen    that   the   common    stock   has   been    nearly 
doubled  while  there  has  been  an  increase  of  nearly  thirty  million 


184 


CHICAGO  &  NORTH  WESTERN 


dollars   in  the  Funded  Debt,  the  capital  increase  amounting  to 
30%,  while  the  earnings  have  increased  50%. 

In  January  of  1907,  $24,403  common  stock  of  the  $100,000,000 
authorized  in  1906,  was  sold  to  shareholders  at  par,  to  the  extent 
of  25%  of  their  holdings,  the  accruing  "rights"  selling  at  $15  to 
$18  per  share. 

Character  of  Traffic. 

The  reports  of  the  North  Western  do  not  itemize  the  traffic 
beyond  the  sources  of  earnings.  For  1906  passenger  earnings 
represented  23%  of  gross,  and  freight  earnings  72%. 

Though  generally  ranked  as  chief  of  the  "Grangers,"  in  Wall 
Street  parlance,  the  North  Western  has  a  very  heavy  tonnage  of 
iron  ore  from  the  Michigan  districts;  its  lumber  traffic  is  also 
considerable,  and  it  has  a  solid  network  of  railways  through  the 
populous  portions  of  Northern  Illinois,  Wisconsin,  Iowa  and 
southern  Minnesota,  covering  all  the  important  cities  of  that  sec- 
tion, and  ensuring  it  a  large  merchandise  traffic.  Its  earnings 
therefore  in  no  wise  solely  depend  on  the  grain  traffic.  It 
goes  without  saying,  however,  that  the  lines  in  Iowa,  Minnesota, 
Dakota  and  Nebraska  are  especially  sensitive  to  the  ups  and 
downs  of  agriculture,  and  that  a  part  of  the  great  prosperity  of  the 
northwest  has  been  due  to  the  magnificent  returns  these  western 
fields  have  made  in  recent  years. 


Stability  of  Earnings. 
The  earnings  for  a  period  of  ten  years  have  shown  as  follows 


Year 

Miles  Operated        Gross  Earnings 

Per  Mile 

1895-6 

5,031 

5,031 

5,071 

5,077 

5,219 

5,507 

5,760 

6,332* 

7,404t 

7,408 

7,428 

$33,488,761 
30,977,243 
36,050,561 
38,016,314 
42,950,805 
43,098,587 
46,644,121 
49,842,781 
53,334,634 
55,745,275 
63,481,578 

$6,656 

1896-7 

6,157 

1897-8 

7,109 

1898-9 

7,489 

1899-0 

8,229 

1900-1 

7,826 

1901-2 

1902-3 

8,098 
7,871 

1903-4 

7,203 

1904-5 

7,525 

1905-6 

8,545 

♦Includes  Fremont,  Elkhorn  &  M.  R.  R.  R. 
•[Thirteen  months. 


CHICAGO  &  NORTH  WESTERN  185 

It  will  be  seen  that  the  average  earnings  per  mile  have  in- 
creased scarcely  at  all  since  1900,  having  reached  a  figure  of 
$8,200  per  mile  in  that  year.  The  mileage  earnings  have  shown 
in  several  years  a  considerable  decrease  from  this  figure.  This  is 
due,  chiefly,  it  may  be  said,  to  the  extension  of  the  road  into  the 
new  territory,  and  not  to  any  decrease  in  traffic  on  the  main 
system.  It  will  be  seen  that  the  total  gross  earnings  have  risen 
steadily,  and  that  especially  in  1906  they  increased  phenomenally. 

Maintenance. 

The  amount  appropriated  for  maintenance  of  way  and  struc- 
tures in  1906  was  $6,864,000.  This,  reduced  to  a  mileage  basis, 
was  smaller  than  at  any  time  within  the  last  six  years.  It 
amounted  to  only  $924  a  mile.  This  is  certainly  not  high,  and 
one  will  not  look  for  concealed  earnings  in  this  item.  Neverthe- 
less a  large  portion  of  the  North  Western  is  local  road,  not  ex- 
posed to  the  wear  and  tear  of  through  traffic.  Moreover,  the 
freight  train  load  of  the  North  Western  is  considerably  lower,  for 
example,  than  that  of  the  Burlington,  so  that  while  the  outlay  on 
this  account  does  not  seem  very  heavy,  it  was  possibly  adequate. 

The  outlay  for  equipment  showed  a  heavy  increase,  amount- 
ing to  $9,000,000,  against  $6,400,000  for  the  year  before,  and  this 
in  its  turn  was  considerably  larger  than  the  years  preceding.  Re- 
duced to  a  mileage  basis,  it  amounted  to  $1,215  per  mile,  against 
$866  per  mile  for  the  year  before.  The  report  shows  that  $3,- 
755,000  of  this  amount  went  towards  the  purchase  of  78  new 
locomotives,  and  4,311  freight  cars.  This  is  a  considerable  item, 
and  on  many  a  road  would  have  been  charged  to  capital  account. 

Nevertheless,  outside  of  this  item,  maintenance  did  not 
amount  to  more  than  $1,600  per  locomotive,  $500  per  passenger 
car,  and  $40  per  freight  car.  These  charges  look  rather  low  as 
compared  with  the  heavy  outlay  of  many  eastern  roads,  but  it 
must  be  remembered  that  the  traffic  density  of  the  North  Western 
is  not  high  and  that  its  equipment  is  correspondingly  less  expen- 
sive to  maintain. 

It  is  known,  moreover,  that  the  North  Western  is  in  general  a 
well  maintained  property,  and  the  following  table  shows  .that  the 
maintainance  for  the  year  was  well  up  to  the  general  level  of  the 
road's  policy. 


186 


CHICAGO  &  NORTH  WESTERN 


( 

Year             Traffic  Density 

Maintenance  per  Mile 
Way         i   Equipment 

Total 

1900-1 
1901-2 
1902-3 
* 1903-4 
1904-5 
1905-6 

672,129 
715,701 
636,424 
549,183 
579,434 
694,030 

640,983 
lonths. 
track,  861  miles. 

$1,006 

1,058 

986 

967 

1,008 

924 

$700 
828 
794 
744 
866 

1,215 

$858 

$1,706 
1,886 
1,780 
1,711 
1,874 
2,139 

Average 
*Thirteen  n 
Extra  main 

$991 

$1,849 

St.  Paul 601,003 

Burlington.  .  .  .           580,024 
Rock  Island. ..  .           462,106 

$929 
1,104 
1,022 

$632 

1,032 

759 

$1,561 
2,136 

1,787 

Improvements. 

If,  however,  these  charges  represented  the  total  outlay  from 
earnings,  the  North  Western  would  hardly  possess  the  high  stand- 
ing which  it  does.  As  a  matter  of  fact,  in  addition  to  the  outlay 
of  nearly  $16,000,000  for  maintenance,  an  additional  $6,000,000 
was  set  aside  in  1906  from  earnings  for  new  construction.  This 
policy  has  been  pursued  consistently  by  the  road  for  a  series  of 
years,  the  items  for  seven  years  being  as  follows : 

1899-0 $4,542,042 

1900-1 4,169,526 

1901-2 4,697,055 

1902-3 5,013,418 

1903-4 4,000,000 

1904-5 4,600,000 

1905-6 6,000,000 


$33,022,041 

This  is  a  considerable  sum.  It  compares,  for  example,  with 
$12,223,185  appropriated  from  surplus  by  the  St.  Paul  in  the 
same  period,  and  is  one  of  the  items  that  has  contributed  to  the 
greath  strength  of  the  road. 


Surplus. 

Over  and  above  its  nominal  Fixed  Charges  the  road  has  for 
years  earned  a  surplus  amply  sufficient  to  allow  for  the  large  ap- 
propriations for  improvements  noted  above,  and  to  pay  hand- 


CHICAGO  &  NORTH  WESTERN 


187 


some  dividends  besides.  The  surplus  for  the  year  of  1906 
amounted  to  a  full  10%  on  the  $22,000,000  of  preferred,  and  16% 
on  the  amount  of  common  stock  outstanding  at  the  end  of  the 
year.  The  preferred  stock  is  entitled  to  non-cumulative  divi- 
dends of  7%,  and  after  the  common  has  received  7%  the  pre- 
ferred must  receive  3%  additional;  above  10%  both  issues  share 
alike.  In  the  following  table  these  peculiarities  of  distribution 
have  been  disregarded,  and  the  percentage  shown  as  earned  on 
the  common  stock  represents  the  entire  amount  over  and  above 
the  actual  dividends  paid  on  the  preferred.  They  serve  to  show 
the  solidity  of  the  preferred  dividend,  and  indicate  clearly,  for 
example,  that  the  full  ten  per  cent,  might  have  been  paid  on  the 
preferred,  had  the  appropriations  for  betterments  been  less 
liberal. 


Year           Surplus 

Dividends       Per  cent. 

on  preferred    earned  on 

Stock           Common 

Dividends 

paid  on 

Common 

Average 

Price 
Common 

1900-1         $9,821,287 
1901-2          10,574,826 
1902-3          10,389,261 
1903-4           9,399,742 
1904-5          10,417,822 
1905-6         14,800,553 

7 

8i 

8 
8 
8 
8 

21.1 
22 

17.8 
15.7 
17.8 
17.4 

6 

7 
7 
7 
7 
7 

179 
218 
177 
179 
222 
217 

Dividend  Record. 

The  North  Western  has  a  long  and  enviable  record  of  divi- 
dend disbursements,  such  as  hardly  any  other  western  road  can 
show.  Since  the  close  of  the  long  depression  of  1873-77,  the 
North  Western  has  steadily  paid  dividends  both  on  its  preferred 
and  its  common.     The  record  in  full  is  as  follows: 

Year.  Preferred.         Common. 

1876 iy2 

1S77 iy2 

1878 7  5 

1879 7  5 

1880 7  6 

1881 7  6 

1882 7yA  7 

1883-4 . ...  8  7 

1885 7y2  6y2 

1886-93 ...  7  6 


188  CHICAGO  &  NORTH  WESTERN 

1894 7  3 

1895 7  4 

1896-9 ....  7  5 

1900-1  ....  7  6 

1902 SJ4  6  and   1%   extra. 

1903-6 ....  8  7 

It  will  be  seen  that  after  the  depression  following  1893,  the 
dividend  on  the  common  was  cut  to  3%,  and  to  4%,  but  it  is  to 
be  remembered  that  it  was  a  period  when  more  than  one-quarter 
of  the  railroad  mileage  of  the  country  was  in  the  hands  of  re- 
ceivers. 

Present  Conditions. 

The  general  balance  sheet  of  June  30th,  1906,  showed  current 
assets : 

Currents    assets $23,861,326 

Current    liabilities 9,531,401 


Leaving  a  balance  of $14,329,925 

Of  the  Current  assets,  $16,830,000  was  in  cash. 

At  the  close  of  the  year  the  balance  to  the  credit  of  income 
account,  as  it  is  styled  in  the  report,  that  is  to  say,  the  credit  to 
profit  and  loss,  amounted  to  $13,956,820,  and  the  land  income 
account  represented  $242,850  additional,  making  a  total  of  $14,- 
199,671. 

Investment  Value. 

Both  the  common  and  the  preferred  of  the  North  Western 
have  been  among  the  highest  priced  stocks  on  the  market.  The 
common  sold  at  $271  in  1902,  at  $249  in  January  of  1905,  and  at 
$240  in  January  of  1906.  The  preferred  sold  up  to  $274  in  1902, 
and  $265  in  1905. 

The  common  sold  down  to  $153  in  1903,  and  the  preferred 
to  $190.  These  same  stocks  could  have  been  bought  as  low  as  $84 
for  the  common  and  $128  for  the  preferred  in  1893;  at  the  same 
figure  for  the  common  as  late  as  1896.  Going  yet  farther  back, 
it  is  of  some  interest  to  note  that  the  common  sold  at  $32  a  share 
in  1877,  and  the  preferred  at  $60  in  1878. 

On  the  basis  of  five  years  payments  at  8%,  and  with  a  large 
margin  of  safety,  the  preferred  may  be  regarded  as  a  solid  8% 
stock  with  good  prospects  of  an  increase  in  the  dividend  should 


CHICAGO  &  NORTH  WESTERN  189 

prosperity  continue.  The  7%  dividend  paid  on  the  common 
through  the  last  five  years  cannot  be  increased,  as  noted  above, 
until  the  full  10%  has  been  paid  upon  the  preferred.  But  the 
amount  of  the  preferred  is  not  large,  and  the  extra  2%  over  the 
present  rate  would  require  only  an  additional  $446,000  per  year. 

From  the  point  of  view  of  railroad  finance,  no  complaint 
could  be  made  if  this  full  dividend  were  paid.  If  to  the  $33,- 
000,000  devoted  to  improvements  in  seven  years,  we  add  about 
$14,000,000  shown  to  credit  of  profit  and  loss,  above  all  payments 
at  the  close  of  the  fiscal  year  of  f906,  we  have  a  total  of  $47,- 
000,000  which  represents  rather  more  than  half  again  the  amount 
which  has  been  paid  out  in  dividends  in  the  same  period ;  that  is 
to  say,  for  every  dollar  paid  in  dividends  $1.50  has  been  put  back 
into  the  property.  This  is  very  much  better  than  the  traditional 
''dollar  for  dividends,  dollar  for  improvements,"  policy. 

It  should  be  understood  that  the  very  high  prices  attained 
in  1902  and  1905  were  of  a  somewhat  speculative  nature,  the  first 
being  due  to  the  effort  made  to  control  the  road  in  the  open 
market,  and  the  second  to  rumors  that  the  control  of  the  road 
was  being  purchased  by  the  Union  Pacific  or  Harriman  interests. 

On  the  other  hand,  the  bare  dividends  did  not  represent  the 
full  return  to  the  holders  of  the  stocks.  North  Western  "rights" 
have  been  very  valuable  and  of  frequent  occurrence.  In  1905-6 
these  rights  amounted  to  from  $18  to  $22  per  share,  and  again  in 
1906-7  to  from  $10  to  $18.  The  policy  of  the  road  in  this  regard  is 
liberal,  and  should  further  issues  be  made  from  the  stock  issues 
authorized  in  1906,  additional  rights  would  probably  accrue  to 
the  shareholders. 

Under  the  weight  of  their  repeated  issues  of  rights,  the  com- 
mon sold  down  in  the  Spring  of  1907  to  $138  per  share,  with 
rights  off,  or  the  equivalent  of  about  $148.  This  was  consider- 
ably below  the  figures  reached  in  the  very  moderate  recessions  of 
1905  and  1906.  At  something  like  these  figures,  it  would  present 
a  fairly  attractive  investment,  even  though  in  case  of  a  heavy 
slump,  the  stock  were  to  sell  lower.  There  are  few  solider  se- 
curities on  the  market.  The  stock  is  closely  held,  and  the  sales 
usually  small.  The  accruing  rights  would  offset  the  added  weight 
of  new  stocks  issued,  so  that  the  investor  will  probably  conclude 
that  if  bought  somewhere  around  the  low  prices  of  1907,  that  is, 
around  $150  a  share,  it  would  represent  a  sound  investment. 
Correspondingly,    the    preferred    stock    on    an    8%    basis,    with 


190  CHICAGO  &  NORTH  WESTERN 

accruing'  rights,   would   be    an   equally    attractive    purchase    at 
around  $200  to  $220  per  share. 

There  are  not  lacking  sound  judges  to  predict  very  much 
higher  prices  for  these  stocks,  but  on  the  other  hand,  it  is  to  be 
remembered  that  the  road  runs  through  states  which  are  rather 
prone  to  railroad  agitation,  and  the  attempt  to  pay  higher  divi- 
dends in  the  face  of  less  prosperous  times  might  readily  bring 
about  increased  taxation,  or  hampering  legislation  which  could 
not  fail  to  have  its  effect  upon  the  earnings  of  the  road  and  the 
prices  of  the  stock. 


CHICAGO,  BURLINGTON  AND  QUINCY 

RAILROAD. 

The  "Burlington,"  as  it  is  familiarly  known,  is  one  of  the 
great  roads  of  the  interior  northwest,  operating  a  huge  system 
extending  from  Chicago  in  a  nearly  westerly  line  through  Iowa 
and  Nebraska  to  connections  with  the  Northern  Pacific  at  Bil- 
lings, Montana,  with  numerous  branches  carrying  the  line  to  St. 
Louis,  to  Kansas  City,  to  Denver  and  to  St.  Paul. 

Its  territory  is  to  all  intents  about  the  same  as  that  of  the 
North  Western  and  the  St.  Paul.  At  the  date  of  the  1906  report 
it  was  operating  8,927  miles,  the  average  for  the  year  being 
slightly  below  this,  and  its  gross  earnings  amounted  to  over 
$74,000,000. 

Formerly  one  of  the  independent  lines,  in  1901  control  of  the 
Burlington  was  purchased  by  the  Hill-Morgan  interests.  For 
legal  purposes  the  road  was  leased  to  the  Chicago,  Burlington 
and  Ouincy  Railway,  the  entire  stock  of  which  is  held  jointly  by 
the  Great  Northern  and  the  Northern  Pacific,  these  two  roads 
issuing  for  the  purpose  $215,323,200  joint  4%  collateral  bonds, 
secured  by  the  deposit  of  nearly  all  of  the  original  Burlington 
stock.  The  latter  was  exchanged  for  these  bonds  on  the  basis 
of  $200  per  share,  and  of  the  $110,000,000  of  Burlington  stock, 
only  about  $3,000,000  is  still  outstanding.  The  purchase  at  the 
time  was  criticised  on  the  ground  that  the  price  paid  for  the 
stock  was  exhorbitant.  Mr.  Hill's  retort  was  that  before  many 
years  were  passed,  the  same  people  would  be  accusing  him  of 
having  stolen  the  road.  The  extraordinary  increase  in  the  earn- 
ings of  the  Burlington  in  the  intervening  few  years  has  gone  far 
to  justify  Mr.  Hill's  prediction,  and  has  certainly  justified  the 
purchase  price  paid. 

For  the  year  of  1901,  the  Burlington's  gross  earnings  were 
$50,000,000,  and  the  surplus  shown  for  that  year  amounted  to 
7.3%  on  its  capital  stock.  In  1906  the  actual  surplus  of  the  road 
(a   considerable  part  being  concealed  in  maintenance)   was  un- 

(191) 


192  CHICAGO,  BURLINGTON  &  QUINCY 

doubtedly  above  $18,000,000,  equivalent  to  more  than  17%  on 
the  capital  stock.  It  was  sufficient  to  pay  the  full  interest  on  the 
collateral  trust  bonds  and  leave  an  outstanding  equity  for  the  two 
proprietary  roads  of  perhaps  four  or  five  million  dollars.  This 
is  certainly  a  very  remarkable  showing. 

History. 

The  Burlington  originated  in  what  was  known  as  the  "Cen- 
tral Military  Track  Railroad  Company,"  chartered  in  1851,  its 
present  name  being  assumed  in  1856.  In  1875  the  Burlington  & 
Missouri  River  in  Iowa  was  merged  into  the  parent  road.  The 
Chicago,  Burlington  and  Northern  running  to  St.  Paul,  and  other 
subsidiary  lines  were  absorbed  in  1899,  and  in  1900,  the  remain- 
ing leased  lines  were  taken  over. 

The  line  traverses  the  great  corn  belt  of  Iowa  and  Ne- 
braska, with  a  perfect  network  of  roads  through  its  especial  ter- 
ritory, and  its  earnings  are  vitally  dependent  upon  the  pros- 
perity of  the  farms. 

Ownership. 

In  1906  the  directorate  of  the  Railway  company,  the  lessee  of 
the  road,  included  James  J.  Hill,  then  president  of  the  Great 
Northern ;  James  N.  Hill,  vice-president  of  the  Northern  Pacific ; 
George  B.  Harris,  president,  and  Darius  Miller,  vice-president  of 
the  Burlington  railway;  Charles  E.  Perkins,  of  Burlington,  la., 
former  president  of  the  road;  William  P.  Clough,  fourth  vice- 
president  and  general  counsel  of  the  Northern  Securities  Com- 
pany; Amos  T.  French,  vice-president  of  the  Manhattan  Trust 
Company,  of  New  York ;  John  S.  Kennedy,  vice-president  of  the 
Northern  Securities  Company ;  and  George  W.  Perkins,  of  the 
firm  of  J.  P.  Morgan  and  Company,  all  four  directors  in  the 
Northern  Pacific ;  Samuel  Thorne,  of  New  York,  also  a  director 
of  the  Great  Northern;  and  George  C.  Clark,  of  New  York. 

The  directorate  of  the  original  railroad  company  at  the  date 
of  the  last  report  included  Robert  Bacon,  of  the  firm  of  J.  P. 
Morgan  and  Company;  George  F.  Baker,  president  of  the  First 
National  Bank,  of  New  York,  also  a  director  in  the  Northern 
Pacific  as  well  as  of  the  New  York  Central  and  other  lines ; 
George  C.  Clark.  William  P.  Clough,  New  York;  George  B. 
Harris,  Chicago;  James  J.  Hill,  St.  Paul;  James  N.  Hill,  New- 
York;  John  J.  Mitchell,  president  of  the  Illinois  Trust  Company, 


CHICAGO,  BURLINGTON  &  QUINCY  193 

Chicago;  Charles  E.  Perkins,  Burlington;  Samuel  Thorne ;  and 
Norman  B.  Ream,  also  a  director  in  the  Erie  and  many  other 
roads. 

Capitalization. 

On  June  30th,  1906,  the  capital  account  stood  as  follows : 

Capital   stock $110,839,100 

Funded  debt 174,172,000 

Total  Capital $285,011,100 

Securities  held  (inc.  am't  with  S.  F. 

Trust)    25,879,630 

Approximate  net  capital $259,131,470 

Approx.  net  capital  per  mile $29,128 

Average  miles  operated 8,896 

Net  earnings  on  net  capitalization.  .  .    8.7% 

Stock  on  net  capitalization 42% 

Fixed  Charges  on  Total  Net  Income  45% 

Factor  of  Safety 55% 

A  peculiarity  of  the  Burlington  is  the  large  amount  held  by 
the  trustees  of  sinking  funds,  which  have  not  been  usually  con- 
sidered in  the  capital  estimates  of  other  roads  because  of  the 
general  smallness  of  the  items.  To  the  close  of  the  fiscal  year 
of  1906,  the  Burlington  had  paid  into  its  sinking  fund  nearly 
$26,000,000.  Of  this  amount  there  were  uncancelled  bonds  and 
cash  awaiting  investment  held  by  the  trustees  of  the  sinking- 
funds  amounting  to  $16,276,242;  this  latter  with  "sundry  in- 
vestments" of  $9,603,387,  makes  up  the  item  included  in  Securities 
Held,  in  the  above  estimate. 

It  will  be  seen  that  the  approximate  capitalization  of  the 
road  is  only  $29,128  per  mile,  as  against  $30,257  for  the  North 
Western,  and  $33,922  for  the  St.  Paul. 

The  net  earnings  as  given  in  the  report  amounted  .to  8.7% 
on  the  estimated  net  capitalization,  but  the  net  earnings  shown 
were  after  perhaps  five  millions  of  excess  maintenance  charges, 
so  that  on  a  basis  of  normal  maintenance  this  percentage  would 
have  been  at  least  25%  higher  or  nearer  11%. 

Similarly,  Fixed  Charges  in  1906  consumed  about  45%  of  the 
total  net  income,  but  this  percentage  would  be  very  materially 
decreased,  on  a  basis  of  usual  maintenance.     The  actual  Factor 

13 


194 


CHICAGO,  BURLINGTON  &  OUINCY 


of  Safety,  therefore,  for  the  underlying  securities  is  very  much 
higher  than  the  nominal  55%  shown. 

The  treasury  holdings  of  the  Burlington  are  in  the  main 
bonds  of  its  own  system,  in  which  there  is  no  equity  of  import- 
ance to  the  road. 

Increase  of  Capitalization. 

From  1900,  the  year  before  the  road  came  under  its  present 
ownership,  to  1906,  the  increase  of  capitalization  was  as  follows: 


1900 
1906 


Stock 


Funded  Debt        Total  Cap. 


$98,447,500 
110,839,100 


$134,174,000 
174,172,000 


$232,581,500 
285,311,100 


Gross  Earnings 


$47,535,420 
74,146,670 


Increase  over  six  years:  Total  Capital,  22%;  Gross  Earnings,  56%. 

Character  of  Traffic. 

The  Burlington's  reports  are  very  meagre  and  unsatisfactory 
and  among  other  things  the  road  does  not  itemise  the  character 
of  its  traffic.  Freight  earnings  amount  to  more  than  two-thirds 
of  the  total ;  and  passenger  earnings  make  up  less  than  25%. 

Stability  of  Earnings. 
The  remarkable  increase  in  the  earnings  of  the  Burlington 
through  a  series  of  years  shows  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896-7 

7,180 

$35,526,186 

$4,947 

1897-8 

7,180 

42,800,162 

5,961 

1898-9 

7,249 

43,389,425 

5,985 

1899-0 

7,546 

47,535,420 

6,286 

1900-1 

7,735 

50,051,989 

6,455 

1901-2 

8,109 

53,795,246 

6,634 

1902-3 

8,391 

62,638,379 

7,465 

1903-4 

8,799 

65,228,192 

7,413 

1904-5 

8,871 

65,973,046 

7,437 

1 905-6 

• 

8,896 

74,146,690 

8,335 

It  will  be  seen  that  in  this  period  the  gross  earnings  have 
more  than  doubled,  and  the  earnings  per  mile  have  increased 
about  70%. 

Maintenance. 

Maintenance  charges  of  the  Burlington  have  habitually  been 
very  heavy,  and  have  to  a   considerable  extent  exceeded   those 


CHICAGO,  BURLINGTON  &  OUINCY 


195 


of  the  North  Western  or  the  St.   Paul, 
series  of  years  stand  as  follows : 


The  items   through   a 


Maintenance  per  Mile 

Year 

Traffic  Density 

Total 

Way 

Equipment 

1900-1 

499,229 

$1,119 

$784 

$1,903 

1901-2 

493,502 

960 

916 

1,876 

1902-3 

592,641 

1,084 

907 

1,991 

1903-4 

591,827 

1,107 

952 

2,119 

1904-5 

590,819 

1,025 

1,103 

2,128 

1905-6 

713,568 
580,024 

1,271 
$1,094 

1,533 
$1,032 

2,804 

Average 

$2,126 

Ncrth  Western . 

640,983 

$     991 

$858 

$1,849 

St.  Paul 

601,003 

929 

632 

1,561 

Rock  Island  .  .  . 

462,106 

1,022 

759 

1,781 

Mo.  Pac.  (2yrs.) 

623,807 

819 

821 

1,640 

Miles  extra  track,  525 

It  will  be  seen  that  the  average  traffic  density  for  these  six 
years  was  slightly  below  the  North  Western  or  the  St.  Paul 
while  the  average  expenditures  for  the  Burlington  have  been 
about  $300  per  mile  more  than  the  North  Western  and  nearly 
$600  over  the  St.  Paul. 

It  will  be  noted,  too,  that  there  was  an  exceptionally  heavy 
increase  in  the  maintenance  charges  for  1906,  the  average  ex- 
penditure of  $2,804  per  mile  for  that  year  for  the  Burlington 
comparing  with  $2,139  for  the  North  Western,  and  $1,661  for  the 
St.  Paul. 

The  maintenance  charges  are  not  separately  itemized  so  as 
to  permit  of  analysis,  but  it  is  safe  to  say  that  normal  main- 
tenance is  very  much  more  represented  by  the  figures  for  1904-5 
than  in  those  of  1906.  This  difference  amounted  to  between  six 
and  seven  hundred  dollars  per  mile  at  least.  Taken  at  the  lower 
figure,  this  on  the  8,900  miles  of  road  operated,  would  have  meant 
a  difference  of  more  than  $5,000,000  in  the  net  earnings  and  in- 
come of  the  road,  and  would  increase  the  surplus  shown  by  that 
amount. 

It  is  to  be  noted,  however,  that  the  Burlington  does  not  set 
aside  a  special  improvement  fund,  as  do  most  other  roads,  its 
improvements  being  charged  directly  to  operating  expenses.  Thus 
for  example,  in  the  seven  years  to  1906  the  total  appropriations 
for  improvements  on  the  North  Western  amounted  to  over  $33,- 
000,000,  an  average  of  $4,500,000  per  year.  Here,  as  elsewhere,  it 
will  be  seen  that  surplus  and  earnings  are  a  good  deal  a  matter 


196 


CHICAGO,  BURLINGTON  &  QUINCY 


of   bookkeeping   and   the    nominal    difference   between    different 
roads  has  often  little  basis  in  reality. 

Surplus  Earnings. 

The    nominal    surplus    shown    for    six   years    has    stood    as 
follows : 


Year 

Surplus 

Surplus  after 

all  payments 

(Gt.  N.-N.P. 

Equity) 

Per  Cent. 

Earned  on 

Common 

Dividend 

Paid  on 

Common 

Average 
Price 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

$8,125,408 
10,083,011 
13,326,108 
12,814,917 
13,804,778 
12,742,430 

$1,263,389 
4,491,256 
3,980,167 
4,969,925 
3,907,572 

7.3 
9.1 
12.1 
11.6 
12.5 
11.5 

6 

7 
7 
7 
7 
7 

169 
153 
177 
215 

213 

As  already  noted,  if  a  matter  of  $5,000,000  maintenance 
exchange  were  added  to  the  nominal  surplus  shown  in  1906,  the 
percentage  indicated  as  actually  earned  on  the  common  stock 
would  have  risen  more  than  40%. 

Dividend  Record. 

Like  the  North  Western,  the  St.  Paul,  and  the  Illinois  Cen- 
tral, the  Burlington  has  been  a  steady  dividend  payer  for  almost 
its  entire  history,  and  since  1873  the  smallest  dividend  paid  in 
any  year  was  4%.    The  record  from  1873  is  as  follows: 

1873-6 

1877 

1878 

1879 

1880 

1881-7 

1888 

1889 

1890 

1891 

1892-3  

1894 

1895-7 

1898 

1899-01  

1901-6 


10 

yearly 

9 

10/2 

8 

9Va 

and  20%   stock. 

8 

yearly 

5 

4 

5 

4^ 

5 

yearly 

4^4 

4 

yearly 

5^ 

6 

yearly 

7 

(under  lease) 

CHICAGO,  BURLINGTON  &  QUINCY  197 

The  Balance  Sheet. 

The  balance  sheet  shown  in  the  report  is  entitled  "A  com- 
posite balance  sheet,"  and  is  of  both  the  railway  and  the  rail- 
road companies.  It  is  not  made  up  in  the  usual  form,  and  is 
not  overly  informing.    It  showed: 

Cash    $14,423,240 

The  current  liabilities  were  : 

Unpaid  vouchers  and  payrolls  $6,030,905 

Coupon  interest   2,344,692 

Sundry  accounts  balance 1,501,496 

$9,877,093 

Leaving"  a  working-  balance  of $4,546,147 

Great  Northern  and  Northern  Pacific  Equity. 

Nominally  the  undistributed  surplus  remaining  after  all 
charges,  the  payment  of  7%  dividends  on  the  three  millions  of 
outstanding  stock  not  deposited  under  the  bonds,  and  the  interest 
on  the  joint  collateral  bonds,  amounted  in  1906  to  $3,907,572. 
The  same  item  for  the  years  since  the  purchase  of  the  road  by 
the  Hill  interests  are  shown  in  the  tables  of  surplus  earnings. 

If,  however,  $5,300,000  were  added  to  the  nominal  net  surplus 
shown  in  1906,  the  equity  remaining  for  the  two  proprietary 
roads  would  be  in  excess  of  $9,000,000.  It  could  be  conservatively 
estimated  at  least  half  this  or  over  $2,000,000  for  each  road. 

It  is  understood  that  the  controlling  interests  in  the  prop- 
erty have  had  in  mind  to  transfer  the  Northern  Pacific's  holdings 
to  the  Great  Northern.  This  might  be  accomplished  by  the 
retirement  of  the  present  collateral  trust  bonds  and  the  pur- 
chase of  the  Northern  Pacific's  equity  by  the  Great  Northern. 
The  collateral  bonds  may  be  retired  at  105  and  interest,  which 
would  require  a  total  of  about  $226,000,000. 

It  is  estimated  that  perhaps  $20,000,000  has  been  earned  by 
the  Burlington  since  the  purchase  and  turned  back  into  the  road 
for  new  equipment,  etc.  It  is  evident  that  if  the  equity  of 
either  road  amounted  to  no  more  than  half  the  estimated  amount 
which  this  would  represent  in  1906,  the  value  of  this  equity 
would  still  be  considerable.  If  the  half  of  this  equity  were 
estimated  as  worth  no  more  than  $2,000,000,  and  this  were 
capitalized  at  say  7%,  the  value  of  the  equity  to  either  road  would 


198  CHICAGO,  BURLINGTON  &  QUINCY 

be  worth  in  the  neighborhood  of  from  $20,000,000  to  $30,000,000; 
and  should  the  Burlington's  earnings  continue  to  increase  at 
the  same  rate  as  in  the  last  ten  years,  this  value  would  certainly 
be  higher. 

It  is  probable  that  $20,000,000  would  not  be  an  excessive 
estimate  as  to  the  actual  profit  which  the  purchase  of  the  Bur- 
lington represents  to  either  road  to  date.  The  transaction  is 
one  of  the  most  remarkable  in  American  railroad  annals  and  is 
only  equalled  by  the  extraordinary  rise  in  the  value  of  the  North- 
ern Pacific  stock  purchased  by  the  Union  Pacific  prior  to  the 
formation  of  the  Northern  Securities  Company. 

In  the  event  of  the  purchase  of  the  Northern  Pacific's  inter- 
est in  the  Burlington,  the  latter  would  probably  pass  directly 
under  Hill  management,  and  might  be  leased  to  the  Great  North- 
ern. This  would  give  the  Great  Northern  a  through  line  to 
Chicago  (which  it  now  practically  enjoys)  and  the  extension  of 
the  Burlington  from  Billings,  Montana,  to  Great  Falls  or  some 
point  on  the  Great  Northern  line  would  provide  a  second  through 
route  for  the  Great  Northern  from  Chicago  to  the  Pacific  Coast. 

The  outstanding  amount  of  the  old  Burlington  stock  appears 
but  seldom  on  the  exchanges.  Quotations  since  the  purchase 
have  ranged  from  a  low  point  of  $170  in  1903  to  a  high  point  of 
$250  in  1904.  In  1906  the  price  ranged  between  $207  and  $220. 
A  considerable  premium  might  be  offered  for  the  retirement  of 
this  stock,  though  any  impelling  reason  for  this  seems  slight. 
Barring  this  vague  possibility,  it  is  a  stock  with  no  other  pro- 
spects than  of  earning  its  solid  7%  ;  and  is  worth  what  any  one 
wishes  to  pay  for  a  gilt-edge  security  on  that  basis,  and  no 
more. 


CHICAGO  GREAT  WESTERN  RAILWAY. 

The  Chicago  Great  Western  somewhat  belies  its  name  in  that 
it  is  rather  one  of  the  minor  roads  reaching  westward  from  Chicago 
to  Omaha,  with  branches  to  St.  Paul  and  Minneapolis  towards  the 
north,  and  to  Kansas  City  towards  the  south.  It  is  absolutely  inde- 
pendent, being  owned  chiefly  in  England,  and  it  has  been  a  thorn  in 
the  flesh  of  middle  western  railroads  by  its  free  tendency  to  rate- 
cutting. 

The  Great  Western  represents  a  reorganization  and  change  of 
name  of  the  Chicago,  St.  Paul  and  Kansas  City  Railway,  which 
operated  a  line  spreading  out  like  a  three-cornered  star  from  Oel- 
wein,  in  northeastern  Iowa,  to  St.  Paul,  Chicago  and  Kansas  City. 
In  1901  a  syndicate  was  formed  to  acquire  the  Mason  City  and  Fort 
Dodge  Railroad  in  the  interest  of  the  Great  Western,  and  this  small 
line  was  extended  so  as  to  join  the  Great  Western,  and  also  con- 
tinued southwest  from  Fort  Dodge  to  Council  Bluffs,  133  miles. 
To  this  line,  in  1904,  the  Great  Western  transferred  89  miles  of  road, 
which  accounts  for  the  reduction  in  the  mileage  of  the  road  nomi- 
nally operated  by  the  Great  Western.  All  the  stock  of  the  Mason 
City  and  Fort  Dodge  is  owned  by  the  Great  Western,  though  the 
road  reports  separately. 

Another  subsidiary  company  is  known  as  the  Wisconsin,  Minne- 
sota and  Pacific  Railroad,  operating  a  line  from  Mankato  to  Red 
Wing,  in  Minnesota,  and  thence  to  Winona,  and  to  Osage,  in  Iowa. 
Its  stock  is  entirely  owned  by  the  Great  Western,  and  these  three 
roads  make  up  what  is  known  as  the  Great  Western  System  with  the 
following  mileage  and  earnings : 

Mileage.  Gross  Earnings.     Net  Earnings. 
Chicago  Great  Western....     818  $8,573,148  $2,755,492 

Mason  City  &  Fort  Dodge..     378  1,863,455  719,476 

Wis.,  Minn.  &  Pacific 271  711,082  348,763 


Totals 1,467  $11,147,685  $3,823,732 

The  Chicago  Great  Western  is   in  more  senses  than  one  sui 
generis,  and  has  practically   no  affiliations   with   other   roads.      It, 

(199) 


200  CHICAGO  GREAT  WESTERN 

therefore,  shares  no  advantages  of  any  community  of  interest  ar- 
rangements, and  has  been  conducted  as  a  thorough  free  lance. 

Ownership. 

The  Great  Western  is  almost  entirely  the  creation  of  its  presi- 
dent, Alpheus  B.  Stickney,  of  St.  Paul,  who  despite  the  peculiarities 
of  capitalization  and  policy  of  his  road,  is  regarded  as  one  of  the 
ablest  and  most  aggressive  of  western  railroad  managers ;  and  he 
has  been  able  to  win  and  hold,  in  a  singular  degree,  the  confidence  of 
the  British  shareholders,  who  are  the  main  owners  of  the  road's 
securities. 

The  directorate  of  the  road  includes  President  Stickney,  Ansel 
Oppenheim,  vice-president ;  Sam  C.  Stickney,  vice-president  and 
general  manager ;  Frederick  Weyerhaeuser,  one  of  the  lumber  kings 
of  the  northwest ;  J.  W.  Lusk,  R.  C.  Wright  and  M.  D.  Flower,  all 
of  St.  Paul ;  T.  H.  Wheeler,  vice-president  of  the  National  Storage 
Company,  New  York,  and  H.  E.  Fletcher,  of  Minneapolis.  Mr. 
Weyerhaeuser  is  also  a  director  in  the  Great  Northern  and  other 
roads,  but  this  implies  no  special  affiliations. 

Aside  from  the  directorate,  there  is  an  English  Finance  Com- 
mittee, made  up  of  Howard  Gilliat,  chairman ;  Alexander  F.  Wallace, 
Edwin  Waterhouse,  and  Sir  Charles  Tennant,  Bart.,  all  of  London. 

Capitalization. 

On  June  30th,  1906,  the  capital  account  of  the  road  stood  as 
follows : 

Common    stock $44,464,545 

5%  Preferred  stock  "A" 11,336,900 

4%  Preferred  stock  "B" 23,103,842 

Total $78,905,287 

Funded  Debt: 

4%  Debenture  stock $26,127,089 

5%  Gold  notes 8,473,060 

5%  Equipment  warrants 272,271 

Total $34,872,420 

Nominal    capital $113,777,707 

Rentals  capit.  at  4% 10.250,000 


Approx.   gross  capitalization.  .  .$124,027,707 


CHICAGO  GREAT  WESTERN  201 

Securities    held 39,216,754 

Approx.   net  capitalization $84,800,953 

Approx.  net  capitalization  per  mile.  .        $103,668 
Miles  operated 818 

Net  earnings  on  net  capital 3.0% 

Stock  on  net  capital 92% 

Fixed  Charges  on  total  net  income.  .  67% 

Factor  of  Safety 33% 

It  will  be  seen  from  the  above  that  the  road  is  enormously  over- 
capitalized, its  figure  of  $105,400  per  mile  here  estimated,  standing 
against  a  similar  figure  of  $30,250  per  mile  for  the  Chicago  and 
North  Western,  and  $33,900  per  mile  for  the  St.  Paul,  two  of  the 
great  railway  systems  of  the  country. 

The  net  earnings  of  the  Great  Western  represent  only  3.0%  on 
the  estimated  net  capitalization,  as  against  10.5%  for  the  Chicago 
and  North  Western,  9.7%  for  the  St.  Paul. 

It  should  here  be  explained  that  in  the  make-up  of  its  report, 
the  Chicago  Great  Western  includes  in  its  gross  earnings,  $227,000 
of  surplus  earnings  of  its  subsidiary  lines.  This  item  legitimately 
belongs  under  Other  Income,  and  does  not  represent  a  part  of  the 
Gross  Earnings  of  the  Great  Western's  own  line.  It  has,  therefore, 
been  deducted  from  the  net  earnings  shown  in  the  report,  in  conse- 
quence of  which  the  net  earnings  become  $2,520,000  instead  of  $2,- 
755,000,  as  shown  in  the  report. 

It  is  also  to  be  noted  that  this  same  item  of  surplus  earnings 
is  counted  twice  in  the  table  of  earnings  of  the  Great  Western  system 
given  above,  from  the  printed  report  of  the  company ;  and  the 
figures  given  for  the  system  are  to  the  same  extent  misleading. 

Style  of  Capitalization. 

The  over-capitalization,  however,  is  wholly  represented  by  stock, 
so  that  it  really  does  no  harm  save,  perchance,  to  the  unreflecting 
investor.  From  the  tabulation  given  above  it  will  be  seen  that  three 
classes  of  stock  constitute  92%  of  the  net  estimated  capitalization. 
On  the  $44,000,000  of  common  stock  no  dividends  whatever  have 
ever  been  paid,  and  none  as  yet  on  the  preferred  "B"  stock,  so  that 
this  $67,000,000  of  stock,  more  than  four-fifths  of  the  total,  repre- 
sents merely  potentialities. 

More  than  this  the  company  has  no  mortgage  debt,  the  place 
of  the  usual  bonded  indebtedness  being  taken,   after  the  English 


202 


CHICAGO  GREAT  WESTERN 


fashion,  by  4%  debenture  stock.  The  interest  on  this  debenture 
stock  is  cumulative,  but  if  it  is  defaulted  the  road  cannot  be  thrown 
into  the  hands  of  a  receiver.  The  interest  simply  becomes  a  charge 
against  future  earnings. 

In  addition  to  this  debenture  stock,  the  company  had  outstand- 
ing about  eight  and  a  half  millions  of  gold  notes,  of  which  $48,000 
is  due  in  1906;  $117,000  in  1907;  $3,342,000  in  1908;  $4,069,000  in 
1909,  and  the  balance  in  the  succeeding  two  years.  In  the  estimate 
of  Fixed  Charges,  the  four  per  cent,  paid  on  the  Debentures  has 
been  included,  but  the  payments  due  on  the  gold  notes  have  not. 
Estimated  in  this  wise,  the  Fixed  Charges  for  1906  consumed  67% 
of  the  Total  Net  Income,  the  $227,000  of  surplus  from  the  subsidiary 
lines  being  included  in  the  latter.  In  this  sense  the  Factor  of  Safety 
on  the  Debenture  stock,  rental  obligations  and  so  forth,  becomes 
33%.  It  should  be  borne  in  mind,  however,  that  the  debenture  stock 
is  a  lien  and  not  a  mortgage,  and  that  the  debenture  holders  could 
not  seize  the  road  in  case  of  defaulted  interest. 


Increase  of  Capitalization. 
The  change  in  the  capital  account  in  six  years  was  as  follows : 


YEAR 

Common 
Stock 

Preferred 
Stock 

"A"  11,303,900 
"B"     7,468,090 
"A"  11,336,900 
"B"  23,103,842 

Debenture 
Stock     and 
Car  Trusts 

$17,990,054 
34,873,420 

Total 

Gross 
Earnings 

1899-00 
1905-06 

$21,308,145 
44,464,545 

$58,070,189 
113,777,707 

$6,721,037 
8,573,141 

Increase  over  six  years :  Nominal  capital,  96%  ;  gross  earn- 
ings, 27%. 

It  will  be  seen  that  while  the  gross  earnings  have  increased  but 
slightly,  the  capitalization  of  the  company  has  been  more  than 
doubled.  A  part  of  this  large  outpour  of  securities  is  offset  by 
the  purchase  or  exchange  of  the  securities  of  subsidiary  lines,  but 
even  when  the  latter  have  been  deducted,  it  will  be  seen  that  the 
new  issues  of  capital  were  hugely  in  excess  of  the  increased 
earnings  shown. 

Equities  Owned. 

The  chief  holdings  of  the  Chicago  Great  Western  are  as  fol- 
lows : 


CHICAGO  GREAT  WESTERN  203 

Mason  City  and  Fort  Dodge 

common  stock $19,205,400 

preferred  stock 13,635,752 

Wis.,  Minn.  &  Pacific  stock 5,893,400 

Total $38,734,552 

Under  the  terms  of  the  agreement  with  the  Mason  City  and 
Fort  Dodge  company,  any  surplus  which  remains  after  the  payment 
of  interest  on  the  bonds,  and  dividend  of  4%  on  the  preferred  stock, 
is  to  be  held  in  trust  by  the  parent  company  as  a  guarantee  against 
the  payment  of  future  coupons.  By  the  agreement  with  the  Wis., 
Minn,  and  Pacific,  all  the  earnings  above  4%  on  the  bonds  go  to 
the  parent  company.  In  1906  a  surplus  of  $137,196  was  shown  on 
the  Mason  City  and  Fort  Dodge,  but  no  payments  were  made  upon 
the  preferred  stock.  The  cumulative  surplus  amounted  on  June  30, 
1906,  to  $1,062,975. 

The  surplus  shown  by  the  Wis.,  Minn,  and  Pacific  for  the  same 
year  was  $90,234,  and  the  cumulative  surplus  $445,845.  The  year's 
surplus  shown  by  these  two  companies  amounted  to  $227,431,  and 
was  turned  over  to  the  parent  company  and  included  in  the  gross 
earnings  of  the  latter,  as  already  noted. 

It  will  be  seen  that  if  this  item  of  subsidiary  surplus  were 
taken  as  the  return  upon  the  $38,000,000  of  stock  held  by  the  parent 
company,  the  interest  so  derived  would  be  extremely  small,  less 
than  1%.  As  a  matter  of  fact  it  simply  goes  to  a  guarantee  fund. 
The  Great  Western's  other  holdings  are  very  slight.  The  mainte- 
nance charges  of  the  subsidiary  roads  were  extremely  light, 
amounting  to  only  $371  per  mile  for  maintenance  upon  the  Mason 
City  and  Fort  Dodge.  It  may  be  taken,  therefore,  that  the  Great 
Western's  $38,000,000  of  securities  owned  is  simply  a  vague  po- 
tentiality, and  at  the  present  time  represents  no  very  valuable  asset. 

Character  of  Traffic. 

The  report  of  the  company  does  not  itemize  its  tonnage,  but  the 
latter  is  known  to  be  of  a  highly  miscellaneous  sort,  so  that  the  pros- 
perity of  the  road  depends  simply  upon  that  of  the  territory  through 
which  it  runs  and  not  upon  any  single  industry.  Its  main  item  is 
undoubtedly  grain.  The  earnings  from  freight  were  nearly  $6,- 
000,000 ;  from  passengers,  nearly  $2,000,000 ;  and  from  other  sources 
very  small. 


204 


CHICAGO  GREAT  WESTERN 
Stability  of  Traffic. 


Despite  its  peculiar  position  among  Western  railroads,  the 
mileage  earnings  of  the  Great  Western  have  risen  steadily  from 
$5,000  per  mile  in  1896-7  to  $10,400  per  mile  in  1906;  that  is  to  say, 
they  have  about  doubled.  This  is,  for  example,  a  much  heavier 
increase  per  mile  than  the  Chicago  and  North  Western,  which  rose 
only  from  $6,600  to  $8,500  in  the  same  period.  The  company's 
business  has  been  built  up  in  the  face  of  solidly  entrenched  rivals, 
so  that  this  remarkable  increase  speaks  excellently  for  the  manage- 
ment of  the  road.  It  shows  that  the  weakness  of  its  securities  lies 
not  in  management  nor  in  earnings,  but  in  the  heavy  burden  of  over- 
capitalization. 


YEAR 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1895-6 

927 
928 
930 
930 
930 
930 
930 
930 
S74 
818 
"818 

$4,709,821 
4,680,860 
5,386,044 
5,867,739 
6,721,037 
7,013,862 
7,549,689 
7,823,191 
8,022,674 
7,377,711 
8,573,141 

$5,080 
5,044 
5,791 
6,309 
7,227 
7,541 
8,118 
8,412 
9,179 
9,015 

10,476 

1896-7 

1897-8 

1898-9 

1899-0 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

Maintenance. 

The  maintenance  charges  on  the  Great  Western  have  been 
fairly  heavy,  as  compared  with  its  competitors  in  the  same  field, 
amounting  in  1906  to  $2,095  per  mile,  as  against  $2,139  per  mile 
for  the  Chicago  and  North  Western,  which  is  considered  one  of  the 
best  managed  roads  in  the  country.  It  should  be  remembered,  how- 
ever, the  latter  has  a  considerable  item  of  extra  track  while  the 
Great  Western  has  not.  On  the  other  hand,  the  Traffic  Density  of 
the  Great  Western  is  about  half  again  as  much  as  the  North  West- 
ern. It  is  fair  to  assume  that  there  are  no  concealed  earnings  in- 
cluded in  the  Great  Western's  maintenance  account.  The  items  for 
six  years  were  as  follows : 


CHICAGO  GREAT  WESTERN 


201 


Year 

Traffic  Density 

Maintenance  per  Mile 
Way            Equipment 

Total 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

896,558 
865,175 
817,545 
921,309 

885,028 
1,065,647 

908,545 

$999 
1,031 
985 
990 
889 
894 

$704 
812 
1,005 
1,170 
1,105 
1,201 

$999 

$1,703 
1,843 
1,990 
2,160 
1,994 
2,095 

Average 

$964 

$1,963 

• 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way            Equipment 

C.  &  N.  W. .  . 
C.  M.  &St.  P.. 
Burlington. .  .  . 

640,983 
601,003 
580,024 

$991 

929 

1,104 

$858 

632 

1,032 

$1,849 
1,561 
2,136 

Improvements. 

On  the  other  hand,  while  the  North  Western  and  other  lines 
in  the  same  field  have  turned  back  into  the  improvement  of  the  road 
large  sums  from  the  surplus,  nothing  of  this  sort  is  shown  by  the 
Great  Western.  The  report  for  1906  shows  improvements  to  the 
amount  of  $959,163,  but  if  this  sum  has  been  drawn  from  the  earn- 
ings and  not  charged  to  capital  account,  this  favorable  fact  is  not 
mentioned. 

Surplus   Earnings. 

The  items  of  surplus  for  the  same  six  years  over  and  above  the 
Fixed  Charges  and  the  payments  on  the  4%  debenture  stock,  have 
been  as  follows : 


Year 

Surplus 

Dividends  on 
Preferred 
Stock  "A"  , 

Per  cent. 
Earned  on 
Common  Stock 

Average 
Price  of 
Common 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

$559,513 
589,645 
576,241 
142,663 
191,400 
695,326 

5 
5 
5 
5 

5* 



16 
24 
21 
19 
19 
24 

*  See  below. 


206  CHICAGO  GREAT  WESTERN 

Only  one  semi-annual  payment  was  made  on  the  preferred  "A" 
in  the  fiscal  year  of  1906,  though  another  payment  charged  to  the 
year's  earnings  was  made  on  October  1st. 

It  will  be  seen  that  in  the  years  of  1904-5  the  items  of  surplus 
showed  a  considerable  drop,  so  that  in  1905  the  dividend  on  the 
preferred  stock  "A"  had  to  be  suspended. 

The  surplus  for  1906  amounted  to  a  full  5%  on  the  preferred 
"A,"  and  the  balance  represented  about  half  of  one  per  cent,  on  the 
$23,000,000  of  preferred  "B." 

The  Balance  Sheet. 

The  balance  sheet  of  June  30th,  1906,  showed : 

Supplies  and  accounts  receivable $2,068,259 

Cash   in   hand 628,206 

Total $2,696,565 

Accounts  payable 1,842,795 

Rentals  and  interest  not  yet  due 234,886 

Total $2,077,681 

leaving  a  balance  of  $618,884. 

On  the  4%  debentures  there  was  interest,  due  July  15th,  1906, 
amounting  to  $522,490. 

Investment  Value. 

The  4%  cumulative  debenture  stock,  in  the  last  four  years,  has 
ruled  between  $80  and  $90  per  share.  At  $83,  the  average  price 
for  1906,  the  return  to  the  investor  is  about  4^4%. 

While  the  interest  on  this  stock  has  been  paid  regularly  through 
a  series  of  years,  it  is  evident  from  the  record  that  the  surplus  over 
and  above  this  payment  has  often  fallen  perilously  near  to  zero,  and 
that  the  interest  has  been  paid  only  through  very  careful  and  eco- 
nomical management.  It  follows,  therefore,  that  while  the  nominal 
Factor  of  Safety  in  1906  amounted  to  33%,  it  was  very  near  nothing 
the  two  years  preceding.  An  investment  in  this  stock,  therefore, 
cannot  be  said  to  possess  any  high  degree  of  security. 

On  the  other  hand  it  is  likely  that  through  the  operation  of  the 
new  railroad  laws,  conditions  will  tend  to  become  more  stable, 
and,  barring  a  very  heavy  setback  of  prosperity,  the  company 
should  be  able  to  maintain  its  payments  on  this  stock.  A  rather 
speculative  security,  yielding  less  than  5%,  can  hardly  be  re- 
garded as  overly  attractive. 


CHICAGO  GREAT  WESTERN  207 

The  quotations  on  the  preferred  "A"  stock  rose  to  $90  per  share 
in  1901-2  but  fell  to  $47  in  1904,  rising  again  to  above  $80  a  share 
in  1906  and  declining  to  $50  in  April  of  1907.  If  the  security  on 
the  debenture  stock  is  not  very  great,  it  follows  that  the  security 
on  the  preferred  "A"  is  still  less.  At  $65  per  share,  the  full  5% 
would  yield  the  investor  7.7%,  which  is  none  too  high,  consider- 
ing its  speculative  nature.  It  can  scarcely  be  considered  very 
attractive  to  cautious  investors  at  anything  above  this  figure.  If 
the  prosperity  of  the  road  should  continue,  the  value  of  this  stock 
may  be  somewhat  enhanced,  but  not  a  great  deal,  since  the  divi- 
dend is  limited  and  not  cumulative. 

Nothing  has  ever  been  paid  on  the  $23,000,000  of  the  preferred 
"B"  stock,  and  little  or  nothing  has  ever- been  earned.  In  order  to 
pay  a  full  4%  dividend  on  this  stock,  the  surplus  shown  in  1906 
would  have  to  be  more  than  doubled,  and  the  surplus  in  1906  was 
the  largest  the  road  has  ever  shown.  It  follows,  therefore,  that  this 
stock  has  only  a  nominal  value,  and  represents  simply  possibilities. 
The  price  was  run  up  to  $56  in  the  boom  year  of  1901 ;  it  fell  as  low 
as  $20  per  share  in  1904.  It  represents  a  pure  speculation.  If  pur- 
chased at  its  low  price  of  1907  of  $15  per  share,  and  held  for  a 
number  of  years,  it  might  yield  the  investor  a  good  return,  but 
this  would  be  only  contingent  upon  the  undiminished  prosperity  of 
the  road,  which  would,  in  turn,  depend  upon  the  prosperity  of  the 
middle  west. 

If  the  twenty-three  millions  of  preferred  "B"  is  at  the  present 
time  of  only  speculative  value,  it  is  difficult  to  see  that  the  forty-four 
millions  of  common  stock  has  any  value  at  all.  The  4%  on  the 
preferred  "B"  would  require  eight  or  nine  hundred  thousand  dol- 
lars additional  in  surplus  earnings  above  the  $695,000  shown  in 
1906.  Even  a  one  per  cent,  dividend  on  the  common  stock  would 
require  $440,000  more,  making  a  sum  nearly  three  times  the  highest 
surplus  the  road  has  yet  earned. 

In  view  of  this  fact  it  is  evident  that  quotations  of  $35  per  share 
shown  in  1902  had  but  one  possible  basis.  This  is  the  idea  long  en- 
tertained that  the  Great  Western  would  be  "bought  up"  by  some  one 
of  its  big  rivals. 

The  necessity,  though  not  perhaps  the  probability  of  such  a 
purchase  has  been  very  considerably  diminished  by  the  passage 
of  the  new  Rate  Bill  and  it  is  notable  that  the  highest  price 
touched  by  the  stock,  even  in  the  high  prices  of  1906,  was  $23  per 


208  CHICAGO  GREAT  WESTERN 

share.  In  June,  1906,  the  price  had  fallen  to  $16.  It  was  S10  per 
share  in  May,  1907. 

It  is  a  stock  which  will  probably  fluctuate  between  rather  wide 
extremes.  Anyone  who  could  put  it  away  when  the  market  in 
general  had  fallen  to  a  very  low  level,  would  probably  be  able  to 
dispose  of  his  holding  at  a  handsome  increase  when  the  market  had 
grown  up  again.  As  to  what  would  represent  a  low  figure  it  is  not 
easy  to  determine.  If,  when  the  market  is  at  top  levels,  the  price 
ruled  around  $18  a  share,  it  is  likely  that  with  a  heavy  general 
slump,  it  would  be  somewhere  around  or  below  the  low  price  of  1907. 

The  low  quotations  of  May,  1907,  were  reached  following 
the  publication  of  the  report  of  the  Sundberg  Investigating  Com- 
mittee of  the  Minnesota  State  Legislature,  which  severely  criti- 
cised the  capitalization  of  Minnesota  railroads  and  especially  of 
the  Great  Western.  This  was  a  part  of  the  revived  "granger" 
agitation  which  swept  the  western  states  in  the  winter  of  1906-7. 


CHICAGO,  INDIANA  AND  SOUTHERN 

RAILROAD. 

The  Chicago,  Indiana  &  Southern  Railroad  was  organized 
in  1906  as  a  consolidation  of  the  Indiana,  Illinois  &  Iowa  and 
the  Indiana  Harbor  Railroad  companies.  At  the  time  of  the 
reorganization  it  acquired  the  entire  capital  stock  of  the  Dan- 
ville &  Indiana  Harbor  Railroad.  The  company  operates  two 
lines,  one  extending  from  Indiana  Harbor  on  Lake  Michigan 
due  south  to  Danville,  Illinois,  the  other  at  right  angles  to  this 
from  South  Bend,  Indiana  to  Churchill  in  the  Spring  Valley  coal 
fields  of  Illinois. 

Jan  1,  1907,  the  company  had  outstanding: 

Common  stock  $15,000,000 

Preferred    5,000,000 

50-year  4%  gold  bonds  10,000,000 

I.  I.  &  I.  first  mtge.  bonds 4,850,000 

Total  $34,850,000 

The  Lake  Shore  in  1906  owned  all  of  the  preferred  and 
$12,000,000  of  the  common  and  in  addition  $7,000,000  of  the  first 
mortgage  bonds.  The  balance  of  the  common  stock  ($3,000,000) 
was  owned  by  the  Michigan  Central. 

For  the  fiscal  year  of  1906  the  company  showed 

Gross  earnings  $2,332,731 

Net  earnings 480,923 

Total  net  income 513,172 

Fixed  Charges   254,868 

Surplus  258,304 

The  surplus  shown  was  about  double  the  surplus  earnings 
of  the  constituent  roads  of  the  year  previous,  after  somewhat 
increased  maintenance  charges.  Fixed  charges  of  1906  were 
50%  of  the  total  income  and  the  balance  remaining  was  suffi- 
cient to  pay  the  4%  cumulative  dividend  on  the  preferred. 

The  road  may  be  classed  as  a  tributary  to  the  Lake  Shore 
and  its  chief  officials  are  the  same  as  those  of  the  New  York 
Central-Lake  Shore  system. 

14  (209) 


CHICAGO,  INDIANAPOLIS  AND  LOUISVILLE 

RAILWAY. 

(The  Monon) 

The  Chicago,  Indianapolis  and  Louisville,  more  generally  known 
as  the  "Monon,"  from  a  town  in  Indiana,  is  a  road  leading  southward 
from  Chicago  and  from  Michigan  City,  on  Lake  Michigan,  through 
Indiana  to  Indianapolis  and  Louisville.  It  is  jointly  owned  by  the 
Louisville  and  Nashville  and  the  Southern  Railway,  having  been 
purchased  for  the  purpose  of  providing  a  through  route  for  these 
roads  to  Chicago.  It  is  the  old  Louisville,  New  Albany  and 
Chicago,  which  was  sold  under  foreclosure  in  1897. 

The  Chicago  and  Western  Indiana,  whose  stock  is  owned  by  the 
Monon,  is  operated  under  a  999  years  lease,  which  gives  the  Monon 
entrance  into  Chicago.  The  Monon  owns  also  a  one-third  interest 
in  the  Kentucky  and  Indiana  bridge  at  Louisville.  It  operates  a 
total  of  592  miles,  chiefly  in  western  Indiana. 

Ownership. 

In  1902  the  Louisville  and  Nashville,  with  the  Southern  Rail- 
way, acquired  92^/2%  of  the  common  stock,  and  77°/o  of  the  pre- 
ferred stock,  on  a  basis  of  $78  a  share  for  the  common,  and  $90  a 
share  for  the  preferred.  The  two  roads  issued  for  this  purchase, 
fifty-year  4%  collateral  trust  gold  bonds,  secured  by  the  stock  so 
acquired. 

Management. 

The  officers  of  the  road  are  William  H.  McDoel,  president, 
Chicago ;  Morton  F.  Plant,  vice-president,  New  York.  The  direc- 
torate includes  Temple  Bowdoin,  Thomas  W.  Joyce,  R.  M.  Galla- 
way,  Charles  Steele,  Morton  F.  Plant,  A.  H.  Gillard  and  Amos  T. 
French,  New  York;  William  H.  McDoel,  Gilbert  B.  Shaw,  E.  C. 
Field,  Chicago,  and  James  Murdock,  Lafayette,  Ind.  These  are 
chiefly  representatives  of  the  two  controlling  roads. 

(210) 


CHICAGO,  INDIANAPOLIS  &  LOUISVILLE         211 

Capitalization. 

Common    stock $10,500,000 

Preferred    stock 5,000,000 

Total  stock $15,500,000 

Funded   debt 14,942,000 

Nominal    capital $30,442,000 

Rentals  capit.  at  4% 6,370,000 

Approx.  gross   capitalization $36,812,000 

Securities    held 2,702,165 

Approx.  net  capitalization $34,109,835 

Approx.  net  capitalization  per  mile.  .  $57,618 

Average  miles  operated 592 

Net  earnings  on  net  capitalization.  .  .  6.4% 

Stock  on  net  capitalization 45% 

Fixed  Charges  on  Total  Net  Income  50% 

Factor  of   Safety 50% 

Earnings  and  Dividends. 

Of  the  earnings  of  the  road,  passenger  traffic  yielded  25% 
and  of  the  freight  traffic  the  largest- single  item  was  products  of 
mines,  44%,  of  which  bituminous  coal  formed  12%,  and  stone, 
sand  and  like  articles,  27%. 

The  earnings  of  the  road  have  increased  steadily  from  $2,- 
902,000  in  1896-7,  to  $5,921,000  in  1906.  The  road  showed  a  de- 
ficit in  the  second  year  of  its  reorganization.  Since  then,  that  is 
from  1898,  it  has  shown  a  steadily  increasing  surplus  which 
amounted  to  $1,197,636  in  1906.  This  was  equivalent  to  4%  on 
the  preferred  and  9.5%  on  the  common. 

Dividends  of  4%,  to  which  the  preferred  is  limited,  have  been 
paid  since  1900.  Dividends  of  3%  on  the  common  were  paid  in 
1905  and  1906,  payments  being  semi-annual. 

Maintenance  has  apparently  been  quite  adequate,  amounting 
to  nearly  $2,700  per  mile  in  1906.  The  credit  to  profit  and  loss 
at  the  close  of  the  fiscal  year  of  1906,  was  $4,647,437. 

Investment  Value. 
Since  the  road  is  so  largely  owned  by  the  two  roads  dividing 
the  controlling  interest,  the  floating  supply  of  the  stock  has  no 


212  CHICAGO,  INDIANAPOLIS  &  LOUISVILLK 

other  value  save  as  an  investment.  The  stock  is  very  little 
traded  in  on  the  market.  Since  the  preferred  is  limited  to  4%, 
its  value  may  be  estimated  at  from  $70  to  $90  per  share ;  that  is 
to  say,  at  the  price  of  a  fairly  solid  4%  stock. 

The  common  may  readily  receive  larger  dividends  than  it 
docs,  earning  upwards  of  9%. 

As  the  northern  outlet  of  the  two  important  systems,  the 
earnings  should  steadily  increase  as  in  the  past  ten  years,  and 
if  no  recession  in  business  occurs,  the  stock  might  readily  be  put 
on  a  5  or  6%  basis.  It  has  not  been  quoted  on  the  ex- 
change for  some  years.  On  a  3%  basis,  with  prospects  of  an  in- 
crease, it  might  readily  sell  at  $60  or  $80  per  share  or  more.  The 
stock  is  comfortably  earning  a  5%  dividend,  and  if  placed  on  this 
basis  eventually  would  be  worth  above  $100  per  share. 

The  undistributed  equity  of  the  two  controlling  roads 
amounted  in  1906  to  upwards  of  half  a  million  dollars. 


CHICAGO,  MILWAUKEE  AND   ST.  PAUL 

RAILWAY. 

"St.  Paul"  as  it  is  known  in  Street  parlance,  maintains  in 
almost  every  notable  characteristic  a  strict  parallel  with  the 
North  Western.  The  two  roads  occupy  almost  identically  the 
same  territory,  both  are  among  the  best  managed  roads  of  the 
country ;  the  securities  of  both  have  long  been  prized  by  inves- 
tors. There  is  this  difference,  however,  that  whereas  the  North 
Western  is  distinctly  one  of  the  Vanderbilt  lines,  the  St.  Paul 
has  maintained  a  position  of  exceptional  independence.  Lat- 
terly, however,  it  has  seemed  to  draw  into  closer  affiliations  with 
the  Union  Pacific  and  the  interests  dominant  in  the  two  roads 
are  known  to  have  very  close  relations. 

Recently  the  St.  Paul  has  come  into  special  prominence 
through  its  announced  intention  to  extend  its  line  to  the  Pacific 
coast.  In  spite  of  the  fact  tlrat  this  intention  has  been  officially 
announced  and  a  considerable  part  of  the  extension  contracted 
for.  the  report  of  1906  contained  not  a  word  upon  the  subject. 

History. 

The  old  Milwaukee  and  St.  Paul  Railroad  was  organized  in 
war  times,  when  it  was  an  open  question  as  to  whether  Chicago 
or  Milwaukee  would  be  the  chief  port  of  Lake  Michigan.  The 
aim  of  the  company  was  to  extend  the  road  into  Minnesota  and 
the  Dakotas,  and  to  develop  these  regions,  then  a  wilderness. 
St.  Paul  at  the  time  was  an  obscure  hamlet  and  Minneapolis  was 
unknown.  The  purchase  of  the  St.  Paul  and  Chicago,  effected 
after  the  organization,  gave  the  road  a  through  line  from  Mil- 
waukee to  St.  Paul,  and  in  1874  the  extension  from  Milwaukee 
to  Chicago  completed  a  continuous  road  between  Chicago  and 
the  Minnesota  capital. 

Since  then  the  road  has  been  steadily  extended  through 
Iowa,  Minnesota,  and  into  the  Dakotas,  according  to  the  original 
intention.     The  absorption  of  the  Milwaukee  and  Northern  car- 

(213) 


214  CHICAGO,  MILWAUKEE  &  ST.  PAUL 

ried  the  road  into  the  iron  districts  of  peninsular  Michigan,  and 
through  other  extensions  it  reaches  to  Omaha  and  to  Kansas 
City  on  the  south,  to  Fargo  and  other  points  in  North  Dakota  on 
the  north.  The  total  operated  mileage  in  1906  was  6,961,  almost 
the  entire  length  of  which  was  owned  by  the  company  outright. 
The  extensions  of  the  line  westward  from  Chamberlain,  South 
Dakota,  now  under  way  will  carry  the  line  to  Rapid  City  in  the 
Black  Hills;  and  the  800  miles  of  the  Pacific  Coast  extension 
on  which  construction  was  begun  from  Evarts,  on  the  Missouri 
River,  would  reach  into  Montana.  The  company  is  said  to  own 
valuable  terminals  in  Tacoma  and  Seattle,  on  Puget  Sound. 

Ownership. 

The  St.  Paul  had  never,  until  latterly,  been  under  the  domi- 
nation of  any  single  interest,  and  the  stock  is  widely  held.  In 
1905,  the  company  reported  5,832  stockholders.  It  is  evident, 
however,  that  by  1906  Standard  Oil  interests  had  obtained  prac- 
tical control ;  it  is  certain  that  in  conjunction  with  representa- 
tives of  the  George  Smith  Estate,  this  control  is  absolute. 

In  the  directorate,  Standard  Oil  interests  are  directly  repre- 
sented by  William  Rockefeller,  Henry  H.  Rogers  and  Charles  W. 
Harkness.  Peter  Geddes  and  Herman  Le  Roy  represent 
their  own  holdings  and  those  of  the  Smith  estate.  In  1906,  Mr. 
Smith's  place  on  the  board  was  taken  by  his  business  representa- 
tive, Herman  S.  Le  Roy,  a  New  York  attorney.  The  other  di- 
rectors were  Roswell  Miller,  chairman  of  the  board ;  A.  J.  Earling, 
president ;  Frank  S.  Bond,  former  vice  president ;  John  A.  Stew- 
art ;  Joseph  Milbank,  of  New  York ;  J.  Ogden  Armour,  Chicago ; 
Frederick  Layton,  Milwaukee ;  Messrs.  Rogers  and  Earling  are 
also  in  the  directorate  of  the  Union  Pacific,  and  in  close  affilia- 
tion with  them  is  William  G.  Rockefeller,  also  a  director,  and  son 
of  William  Rockefeller.  William  Rockefeller  is  well-known  as  a 
prominent  director  in  the  New  York  Central  system,  the  Dela- 
ware and  Lackawanna  and  other  roads.  John  A.  Stewart  is 
chairman  of  the  Board  of  Directors  of  the  United  States  Trust 
Company,  in  which  Standard  Oil  interests  are  prominently  rep- 
resented. Joseph  Milbank  is  a  capitalist,  and  legatee  of  the  Mil- 
bank  estate.  J.  Ogden  Armour  is  the  present  head  of  the  exten- 
sive Armour  interests  of  Chicago,  and  Frederick  Layton  is  a 
prominent  capitalist  of  Milwaukee. 


CHICAGO,  MILWAUKEE  &  ST.  PAUL  215 

In  the  executive  committee  Standard  Oil  interests  predomi- 
nate. 

Beyond  its  close  connection  with  the  Union  Pacific,  the  St. 
Paul  has  no  especial  affiliations,  and  it  is  not  a  holding  company, 
having  practically  no  interests  in  other  roads. 

Capitalization. 

On  June  30th,  1906,  the  capital  account  stood  as  follows : 

Common    stock $58,183,900 

Preferred    stock 49,654,400 

Total   stock $107,838,300 

Funded   debt    121,849,500 

Nominal     capital $229,687,800 

Rentals  capit.  at  4% 10,525,000 

Approximate    gross    capitalization. $240,2 12,800 
Unsold   bonds   in   treasury 4,077,000 

Approx.   net  capitalization $236,135,800 

Approx.  net  capital  per  mile $33,922 

Average   miles   operated 6,961 

Net  earnings  on  net  capitaliation.  .  9.7% 

Stock  on  net  capitalization 45% 

Fixed  Charges  on  Total  Net  Income  32% 

Factor  of  Safety 68% 

The  rentals  paid  are  small,  adding  but  little  to  the  estimated 
capitalization  of  the  company.  On  the  other  hand  the  company 
has  no  securities  of  other  roads,  and  the  gross  capitalization  is 
to  be  reduced  only  by  the  amount  of  unsold  bonds  held  in  the 
treasury. 

It  will  be  seen  that  the  average  capitalization  per  mile  is 
very  low,  and  as  far  back  as  1901,  President  Miller  stated  in  his 
annual  report  that  the  road  could  not  be  duplicated  for  its  then 
existing  capitalization,  which  was  about  the  same  per  mile  as 
now.  Its  $33,922  of  capital  per  mile  compares  with  $30,252,  for 
the  Chicago  and  North  Western.    The  capitalization  of  the  road 


216  CHICAGO,  MILWAUKEE  &  ST.  PAUL 

as  determined  by  earnings  is  about  the  same,  the  9.7%  for  the  St. 
Paul  comparing  with  10.5%  for  the  Northwestern. 

On  June  30,  1906,  the  stock  of  the  road  represented  45% 
of  the  estimated  net  capitalization,  as  compared  with  43%  for 
the  North  Western.  The  Fixed  Charges  consumed  32%  of  the 
Total  Net  Income,  as  compared  with  39%  for  the  North  Western. 
The  Factor  of  Safety  on  its  securities  for  the  St.  Paul  therefore 
was  slightly  higher  than  that  of  its  chief  rival. 

As  already  stated,  the  St.  Paul  has  no  equities  in  other  com- 
panies. 

Increase  of  Capitalization. 

In  the  six  years  from  1900,  the  capital  and  earnings  of  the 
S..  Paul  increased  as  follows: 


Year         Common 
Year            Stock 

Preferred 
Stock 

Funded 
Debt 

Total 

Gross 
Earnings 

1899-00     $47,146,600 
1 905-06       58,183,900 

$40,454,900 
49,654,400 

$122,256,000 
121,849,500 

$209,857,500 

229,687,800 

$41,884,692 
55,423,052 

Net  increase  over  six  years :  Nominal  capital,  10%  ;  gross 
earnings,  32%. 

In  1906,  $24,802,809  of  new  common  stock  was  sold  to  share- 
holders at  par,  to  the  extent  of  23%  of  their  holdings,  the  result- 
ing rights  therefrom  averaging  from  $15  to  $18  per  share.  Again 
towards  the  close  of  the  year  $33,164,300  new  common  stock  and 
$66,328,600  new  preferred  were  offered  to  the  shareholders  at 
par,  to  the  extent  of  25  and  50%,  respectively,  of  their  total  hold- 
ings, accruing  rights  on  this  issue  selling  at  from  $31  to  $35  per 
share. 

The  result  of  these  issues  was  to  increase  the  amount  of 
common  stock  from  $58,000,000  to  $115,000,000,  and  the  pre- 
ferred from  a  little  under  $50,000,000  to  the  same  as  the  com- 
mon. Payments,  however,  on  the  latter  issue  were  distributed  over  a 
period  of  two  years  and  more  so  that  while  interest  would  be 
paid  on  the  amount  of  the  subscriptions,  the  road  would  not 
meet  full  dividends  on  this  new  stock  until  1909. 

Character  of  Traffic. 

The  St.  Paul  is  one  of  the  great  "grangers,"  and  farm  pro- 
ducts make  up  the  chief  items  of  its  tonnage.     Products  of  the 


CHICAGO,  MILWAUKEE  &  ST.  PAUL 


217 


latter  in  1906  represented  23%,  and  of  animals,  6.3%,  or  a  total 
of  nearly  30%.  Products  of  mines  made  up  28.5%,  of  which  the 
chief  item  was  bituminous  coal.  Lumber  made  up  14%,  manu- 
factures and  miscellaneous  the  balance.  This  is  a  wide  and  very 
even  distribution  of  traffic,  and  means  that  the  prosperity  of  the 
road  is  dependent  simply  on  the  general  prosperity  of  its  ter- 
ritory, and  not  upon  any  single  industry.  It  is  evident,  however, 
that  its  territory  is  distinctly  a  farming  section,  and  that  the 
earnings  of  the  road  are,  at  bottom,  dependent  upon  the  yield 
of  the  fields. 

Passenger  earnings  represented  20%  of  the  gross  earnings  of 
the  company  in  1906. 

Stability  of  Earnings. 

The  mileage  operated  has  not  increased  in  ten  years  as 
rapidly  as  might  have  been  expected,  but  a  very  considerable  in- 
crease will  take  place  in  case  the  Pacific  extension  is  carried  out. 

The  gross  earnings  per  mile  have  risen  from  $5,281  in 
1895-6,  to  $7,961  in  1905-6,  an  increase  of  very  closely  50%.  This 
increase  has  been  very  steady,  showing  practically  no  setbacks, 
but  it  was  especially  large  in  the  year  of  1906.  The  full  table 
follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1895-6 

1896-7 

1897-8 

1898-9 

1899-0 

1900-1 

1901-2 

1902-3.  . 

6,188 
6,191 
6,191 
6,191 
6,347 
6,512 
6,605 
6,647 
6,829 
6,908 
6,961 

$32,681,829 
30,486,768 
34,189,664 
38,310,632 
41,884,692 
42,369,013 
45,613,125 
47,662,738 
48,330,335 
49,884,114 
55,423,052 

$5,281 
4,923 
5,522 
6,187- 
6,851 
6,506 
6.C08 
7  171 

1903-4 

1904-5   . 

7,077 
7,221 
7,961 

1905-6 

The  steady  increase  in  the  earnings  has  been  accomplished 
in  the  face  of  a  steady  reduction  in  the  average  rate  per  ton  mile 
received  from  freight,  the  average  of  the  road  being: 

1877   2.08  cents. 

1887    1.09 

1897   1.00 

1906   86 


218 


CHICAGO,  MILWAUKEE  &  ST.  PAUL 


Maintenance. 

The  maintenance  charges  for  the  St.  Paul,  compared  with 
eastern  roads  look  small.  They  average  only  a  little  over  $900 
for  way,  and  a  little  over  $600  for  the  equipment.  They  are  con- 
siderably smaller,  for  example,  than  the  Chicago  and  North  West- 
ern, where  the  average  for  way  is  $991  and  for  equipment  $858. 
The  items  for  six  years  are  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

558,965 
604,095 
605,048 
576,717 
590,824 
670,373 

601,003 

$999 

1,092 

1,105 

750 

773 

857 

$929 

$464 
509 
585 
6S1 
750 
804 

$632 

$1,463 
1,601 
1,690 
1,431 
1,523 
1,661 

Average 

$1  561 

Traffic  Density 

Maintenanc 

e  per  Mile 

Total 

Way 

Equipment 

C.  &  N.  W... 
C,  B.  &  Q... 
Rock  Island .  . 

640,983 
580,024 
462,106 

$    991 
1,104 
1,022 

$    858 

1,032 

759 

$1,849 
2,136 

1,787 

On  a  traffic  density  of  600,000  ton-miles  per  mile  of  road 
operated,  a  total  maintenance  of  from  $1,500  to  $1,600  per  mile 
does  not  seem  very  liberal.  Had  the  figure  been  equal  to  that  of 
the  North  Western  for  1906,  this  would  have  added  $500  per  mile 
to  the  St.  Paul's  maintenance  charges  for  that  year,  which  on  a 
total  of  nearly  7,000  miles  would  have  entailed  an  additional 
expenditure  of  $3,500,000.  It  is  evident  that  on  such  a  scale  of 
expenditure,  the  surplus  shown  would  have  been  much  smaller 
than  it  was. 

In  the  report  for  1906,  the  average  of  cost  for  repairs  was 
stated  at  $1,438  per  locomotive;  $667  per  passenger  car;  and  $46 
for  freight  cars. 

Merely  as  an  instance  of  the  wear  and  tear  losses  to  which  a 
large  railway  is  subjected,  the  company's  report  for  1906  states 
that  during  the  year,  444  cars  belonging  to  the  company  were 
destroyed  by  wreck  or  fire  on  its  own  and  other  roads,  and  that 
3,662  old  freight  cars  unfit  for  economical  service,  and  30  small 


CHICAGO,  MILWAUKEE  &  ST.  PAUL  219 

locomotives  were  dropped  from  the  inventory  of  equipment.  In 
addition  to  this,  the  inventory  at  the  close  of  1905  showed  a  short- 
age of  384  cars  and  a  sum  sufficient  to  replace  them  was  charged 
to  operating  expenses.  At  the  close  of  1906  there  was  a  shortage 
of  246  cars,  and  one  locomotive. 

Improvements. 

The  maintenance  charges  of  the  St.  Paul  have  been  consider- 
ably below  those  of  the  North  Western ;  likewise  the  sums  set 
aside  from  surplus  earnings  have  been  considerably  less,  the 
items  for  improvements  for  seven  years  being  as  follows: 

Renewal  and  Addition  to 

Year.  Improvement  Fund.        Property. 

1899-0 $3,025,305 

1900-1 2,296,256 

1901-2 •...     2,245,000 

1902-3 1,105,000 

1903-4 $707,575 

1904-5 619,960 

1905-6 1,511,758  712,331 

Total $12,223,185 

This  sum  compares  with  $33,002,000  set  aside  by  the  North 
Western  within  the  same  period. 

In  addition  to  the  above  sums  the  report  for  1906  shows  a  net 
of  $2,540,466  set  aside  for  the  replacement  of  freight  cars,  drop- 
ped from  the  inventory.  This  amount  would  bring  the  total  set 
aside  from  the  surplus  earnings  for  the  year  up  to  $4,765,000, 
and  this  sum  added  to  the  charges  for  regular  maintenance,  would 
bring  the  total  maintenance  up  to  $15,283,000,  or  $2,195  per  mile, 
that  is  to  say  it  would  increase  the  nominal  sum  devoted  to  mainte- 
nance by  50%. 

Surplus  Earnings. 

The  surplus  earnings  shown  below  are  the  total  sums  avail- 
able for  dividends  and  improvements  after  payment  of  Fixed 
Charges,  and  before  the  sums  set  aside  as  in  the  table  above,  have 
been  deducted. 

For  example,  from  the  nominal  surplus  shown  for  1906,  the 
amount  of  $4,765,000  should  be  deducted  to  show  the  net  surplus 
available  for  dividends.    This  would  reduce  the  percentage  shown 


220 


CHICAGO.  .MILWAUKEE  &  ST.  PAUL 


as  earned  on  common  by  one-third.     The  table  for  a  series  of 
years  follows : 


Year 

Surplus 

Dividends 

Paid  on 

Preferred 

Per  cent. 

Earned  on 

Common 

Dividends 

Paid  on 

Common 

6 

7 
7 

7 
7 

i-i 

i 

Average 
Price 

1900-1 
1901-2 
1902-3 
1903-4 
1 904-5 
1905-6 

$10,476,414 
12,115,458 
11,578,260 
11,425,976 

12,478,788 
14,905,318 

7 
7 
7 

7 
7 
7 

13.1 
15.2 
14.2 
13.8 
15.5 
19.7 

139 
165 
175 
152 
151 
191 

The  column  of  "Per  cent,  earned  on  Common,"  does  not  repre- 
sent the  amount  actually  available  for  dividends  on  the  common 
stock,  since  after  7%  has  been  paid  on  both  the  common  and 
preferred,  the  two  issues  share  alike.  So  for  example,  after  seven 
per  cent,  was  paid  on  both  stocks  the  balance  of  surplus  would 
have  been  equivalent,  for  1906,  to  very  nearly  7%  more,  on  both 
the  common  and  preferred  (6.9),  but  if  from  this  balance  of  sur- 
plus, were  deducted  $4,765,000  devoted  to  improvements,  the  re- 
mainder would  be  equal  to  only  about  2^%  on  the  two  classes 
of  stock. 

Presuming"  that  these  appropriations  w^ould  not  have  been 
made  if  they  had  not  been  needed,  this  latter  figure  is  of  interest 
as  indicating  the  margin  nominally  available  for  an  increase  of 
dividends  on  either  class  of  stock. 

Dividend  Record. 

As  a  dividend  earner,  the  St.  Paul  has  a  record  surpassed  by 
no  western  railway.  With  the  single  exception  of  the  year  of 
1875,  for  35  years  the  dividend  has  been  paid  upon  the  preferred 
stock  continuously,  though  in  the  early  days,  in  one  or  two  years, 
these  dividends  were  paid  in  bonds. 

There  is  a  provision  as  to  the  preferred  stock  that  its  divi- 
dends are  cumulative  to  the  extent  that  they  are  earned,  and  not 
otherwise.  This  accounts  for  the  peculiarities  of  some  of  the 
earlier  dividend  payments. 

The  road  suffered  in  the  years  from  1889  to  1891,  and  in  these 
three  years,  the  dividend  on  the  common  was  suspended.  Since 
1892  a  dividend  has  been  paid  continuously.  The  full  record 
is  as  follows : 


CHICAGO,  MILWAUKEE  &  ST.  PAUL 


221 


Years 


1870  .  . 

1871  .  . 
1872-3. 

1874  . . 

1875  .  . 
1876 
1S77  .  . 
1878.. . 
1S79.. . 
1880-4. 
1885.. . 
1886-7. 
1888.. . 
1889.. . 
1890-1. 
1892. . . 
1893-4. 
1895.. . 
1896.. . 
1897-00 
1901.  .  . 
1902-6. 


Preferred 

Common 

7   %cash  and 

3% 

scrip 

3% 

cash  and  7%  scrip 

7   % 

( ( 

7%     " 

7  % 

<  ( 

7   % 

bonds 

!'■     ,     C 

ash  and 

14% 

bonds 

3*% 

i  i 

Ml'.'. 

7', 

cash 

2*% 

cash 

I", 

i  i 

7"; 

<  < 

7% 

i  ( 

4% 

t  < 

<', 

5% 

u 

6', 

24% 

i  i 

7% 

-•  , 

7'; 

2% 

a 

7', 

■1\ 

t  t 

7% 

2\ 

i( 

7% 

1', 

it 

7% 

5% 

it 

7', 

6% 

a 

7% 

7% 

tt 

The  Balance  Sheet. 

The  balance  sheet  at  the  end  of  June,  1906,  showed  that  the 
company  was  quite  decidedly  in  need  of  working  capital.  The 
current  assets  amounted  to  $9,566,797;  the  current  liabilities  to 
$16,440,706. 

This  left  an  adverse  balance  of  $6,873,989.  Of  the  current 
liabilities,  however,  $2,719,962  was  interest  accrued  and  not  yet 
payable.     The  chief  item  was  bills  payable,  $6,850,000. 

The  item  of  cash  showed  $5,276,888.  The  company's  need 
of  cash  capital  was  later  supplied  by  the  sale  of  stock,  as  noted 
above. 

The  credit  to  profit  and  loss,  itemized  as  Income  Account 
in  the  report,  was  $33,789,997. 

The  St.  Paul  Extension. 

The  most  important  event  in  the  history  of  the  St.  Paul  for 
man)-  years  was  the  determination  of  its  directors  to  extend  the  line 
to  the  Pacific  coast.  The  route  chosen  is  to  the  outside  view 
quite  inexplicable.  Between  the  Union  Pacific  and  the  Northern 
Pacific  lines  there  is  a  wide  belt  of  territory,  from  two  to  three 
hundred  miles  broad,  which  is  crossed  by  no  east  or  west  road, 
unless   the  diagonal  path   of  the  Oregon  Shortline  be  considered. 


CHICAGO,  MILWAUKEE  &  ST.  PAUL 

A  road  pursuing  something  of  a  middle  course  through  this  belt 
would  tap  a  country  rich  in  coal,  oil  and  minerals,  and  have  a  wide 
held  to  itself.  Instead  of  building  through  this  belt,  the  St.  Paul 
is  extending  westward  from  its  most  northerly  western  terminal, 
at  Evarts  on  the  Missouri  river.  It  strikes  directly  for  the  Yel- 
lowstone River,  near  Miles  City,  and  from  this  point  to  the  coast 
to  all  intents  it  doubles  the  route  of  the  Northern  Pacific,  cross- 
ing and  recrossing  the  tracks  of  that  road,  the  two  lines  rarely 
lying  more  than  40  or  50  miles  apart  and  for  long  stretches  side 
by  side. 

The  St.  Paul's  extension  will  be  an  expensive  piece  of  road 
to  build;  its  cost  is  estimated  by  the  St.  Paul  officials  as  some- 
thing like  $50,000  per  mile  and  it  seems  likely  to  be  more,  rather 
than  less  than  this.  It  is  being  built  at  a  time  when  labor  and 
material  are  at  the  highest  point  in  15  years,  its  line  will  be 
slightly  longer  than  the  Great  Northern  route  from  Chicago  to 
the  Pacific  and  longer,  too,  than  the  Northern  Pacific's  route, 
when  the  Helena  cut-off-  is  completed;  it  will  cross  four  mountain 
ranges  as  against  two  for  the  Great  Northern,  and  two  for  the 
Northern  Pacific  when  a  cut  out  on  that  road  in  the  Rockies  is 
completed. 

In  brief,  neither  as  to  grades,  length  of  line  nor  cost  does  it 
present  any  advantages  over  its  rivals;  rather  the  reverse.  When 
the  Great  Northern's  water  grade  line  from  Spokane  to  Portland 
is  built,  that  road  will  be  able  to  carry  freig'ht  at  a  lower  rate  than 
any  other  transcontinental  line,  this  construction  being  a  part  of 
the  scheme  outlined  in  President  Hill's  boast  that  before  the 
Panama  Canal  is  completed,  he  would  have  a  line  from  the  Great 
Lakes  to  the  Pacific  able  to  carry  freight  at  such  rates  that  lily 
pads  would  be  growing  in  the  canal.  This  is  the  sort  of  compe- 
tition that  the  St.  Paul  extension  must  meet  and  which  to  the 
outside  view,  it  will  be  in  no  position  to  meet. 

It  is  true  that  the  St.  Paul's  capitalization  is  very  low;  and 
even  with  the  addition  of  1,500  miles  of  road  costing  $50,000,  or 
$60,000  per  mile,  it  will  be  relatively  low.  It  will  be  lower  than 
the  Union  Pacific  or  the  Northern  Pacific,  but  on  the  other  hand, 
it  will  be  met  by  the  almost  equally  low  capitalization  of  the  Great 
Northern,  with  apparently  higher  haulage  costs.  It  is  true  that 
the  earnings  of  the  Great  Northern  and  of  the  Northern  Pacific 
have  been  enormous.  Likewise  that  there  is  an  immense  and 
growing  business  from  the  Puget  Sound  ports,  eastward.     But 


CHICAGO,  MILWAUKEE  &  ST.  PAUL  223 

the  Northern  Pacific,  and  especially  the  Great  Northern  have 
been  for  a  number  of  years  endeavoring  to  put  themselves  in  the 
best  possible  shape  to  take  care  of  this  business,  and  the  Union 
Pacific  is  now  entering  the  same  field  and  will  soon  be  ready, 
bidding  for  its  share  of  this  traffic.  It  is  equally  true  that  the 
same  interests  which  now  control  the  St.  Paul  practically  domi- 
nate the  copper  industry  which  enters  in  Montana  and  that  a 
large  and  growing  traffic  can  probably  be  turned  to  the  St.  Paul 
when  it  reaches  these  fields. 

But  with  all  these  considerations,  when  the  new  route  of  the 
St.  Paul  is  followed  upon  the  map  it  bears  resemblance  to  noth- 
ing so  much  as  the  West  Shore-Nickel  Plate  paralleling  of  the 
Vanderbilt  lines  from  New  York  to  Chicago  in  the  eighties.  It 
is  well  known  that  the  controlling  interests  of  the  St.  Paul  are 
now  closely  associated  with  the  controlling  interests  of  the  Union 
Pacific,  and  the  latter  are  engaged  in  lively  rivalry  with  the  Hill 
lines.  It  is  impossible  to  suppose  that  so  shrewd  and  conserva- 
tive a  management  as  that  of  the  St.  Paul  should  have  entered 
upon  this  enterprise  without  being  fully  convinced  of  its  sound- 
ness, and  yet  to  the  outside  view  it  bears  much  more  the  appear- 
ance of  a  weapon  or  a  club  than  a  business  enterprise  standing 
on  its  own  feet. 

It  would  be  absurd,  however,  to  suppose  that  this  extension 
could  seriously  cripple  so  rich  and  prosperous  a  road  as  the  St. 
Paul.  The  new  line  is  being  built  by  stock  issues  rather  than  by 
bonds  and  undoubtedly  a  large  traffic  can  be  turned  through  it 
which  would  be  impossible  if  it  were  an  independent  line.  The 
percentage  of  net  income  consumed  by  fixed  charges  on  the  St. 
Paul  is  exceptionally  low,  so  that  even  if  the  extension  were  to 
justify  the  most  pessimistic  criticisms  it  would  still  in  no  wise 
affect  the  value  of  the  funded  securities. 

Investment  Value. 

But  undoubtedly  the  St.  Paul's  extension  has  a  very  mate- 
rial bearing  upon  the  future  of  the  stock  values  of  the  road  and 
should  the  work  of  construction  be  pressed,  the  new  stock  issues 
required  for  this  work  will  weigh  rather  heavily  on  the  market 
price.  Probably  there  are  many  who  would  be  in  no  wise  sur- 
prised if  the  extension  were  to  stop  in  Montana  and  not  be  car- 
ried forward  for  at  least  some  years  to  come. 


■  >/l 


CHICAGO,  MILWAUKEE  &  ST.  PAUL 

Meanwhile  the  significant  fact  which  the  investor  in  St.  Paul 
must  consider  is  that  the  capital  stock  in  a  single  year  has  been 
increased  from  107  to  about  230  million  dollars;  that  is,  it  has 
been  more  than  doubled.  As  already  noted,  in  the  issuance  of 
this  stock,  rights  have  accrued  to  the  shareholders  amounting  to 
from  $45  to  $50  per  share,  and  in  considering  the  value  of  St. 
Paul,  common  and  preferred,  this  amount  is  more  or  less  to  be 
added  to  the  market  price. 

Following  this  heavy  issue  of  new  stock,  in  the  general  reces- 
sion of  prices  in  the  spring  of  1907,  St.  Paul  preferred  sold  down 
to  $145  per  share  and  the  common  to  $122  per  share.  This  was 
equivalent,  rights  included,  to  about  $190  and  $167  on  these 
stocks,  which  compares  with  a  quotation  of  $160  per  share  for 
the  preferred  and  $147  for  the  common  in  the  very  moderate 
slump  in  the  spring  of  1906.  It  is  evident  that  on  a  prolonged 
recession  of  prices  these  stocks  might  sell  very  much  lower.  At 
the  low  level  of  1903-4,  the  preferred  sold  down  to  $168  and  the 
common  to  $133.  But  how  heavily  the  new  issues  will  weight 
the  stock  would  be  only  the  merest  guess.  Obviously  the  pivotal 
question  is  as  to  whether,  if  the  St.  Paul  goes  on  with  this  new- 
work  of  construction,  it  can  continue  comfortably  paying  its  7% 
dividends. 

It  has  already  been  pointed  out  that  even  in  the  prosperous 
year  of  1906,  if  St.  Paul  maintenance  had  been  up  to  the  level  of 
the  North  Western,  to  say  nothing  of  the  Burlington,  the  margin 
remaining  over  after  the  payment  of  the  7%  dividends  wras  not 
large.  In  the  new  issue  of  stock,  the  amount  of  preferred  was 
rather  heavier  than  that  of  the  common,  $66,000,000  of  preferred 
against  $57,000,000  of  common.  But  it  is  not  at  all  likely  that 
even  a  very  serious  business  depression  would  impair  the  secur- 
ity of  the  dividend  on  the  preferred.  This  stock  has  now  received 
its  7%  dividends  continuously  for  eighteen  years.  With  the  pros- 
pect of  an  increase  in  the  dividend  rate  and  further  "rights"  cut 
out,  this  stock  would  tend  to  sell  more  to  the  level  of  a  solid  7% 
security;  that  is,  at  an  average  around  $150  to  $170  per  share. 

St.  Paul  common,  is  a  much  more  speculative  commodity. 
As  one  of  the  old  "market  leaders"  it  has  tended  to  fluctuate 
rather  violently.  It  is  what  is  known  as  a  "volatile"  stock.  Obvi- 
ously after  the  heavy  issues  of  1906,  with  the  consequent  cash 
dividends  equivalent  to  about  $50  per  share,  the  stock  would 
tend  to  sell  at  considerably  lower  levels  than  for  several  years 


CHICAGO,  MILWAUKEE  &  ST.  PAUL  225 

previous;  that  is,  if  there  were  no  other  considerations.  There  is 
such  a  consideration,  however,  and  this  is  that  the  St.  Paul  is  a 
very  valuable  property,  alike  in  itself  and  from  a  strategic  point 
of  view.  At  least  before  the  new  issues,  control  of  St.  Paul  would 
readily  have  sold  at  very  considerably  above  $200  per  share.  It 
is  not  in  the  least  likely  that  the  present  interests  in  control  would 
ever  allow  this  valuable  asset  to  be  slipped  from  under  them, 
and  that  is  why  the  floating  supply  of  St.  Paul,  so  long  as  the 
present  rivalry  between  the  Hill  interests  and  the  Union  Pacific 
interests  continues,  is  likely  to  be  relatively  small.  This  means 
that  it  would  hardly  go  to  as  low  a  level  as  it  otherwise  might, 
even  in  a  general  slump,  and  that  on  the  other  hand,  being  so  easily 
subject  to  manipulation,  it  is  likely  to  show  much  higher  prices 
than  its  intrinsic  value  would  justify. 

There  seems  no  reason  why  St.  Paul  on  a  7°/o  basis  should 
sell  at  a  higher  figure  than,  let  us  say,  Pennsylvania,  and  if  Penn- 
sylvania, on  1906-7  levels  could  sell  below  120,  St.  Paul  common 
might  readily  do  the  same.  Purchased  and  laid  away  at  such 
figures  as  this  it  might,  under  the  conditions  outlined,  readily 
show  a  large  profit  to  its  holder,  always  provided  that  its  earn- 
ings continue  to  justify  the  payment  of  its  present  dividend. 


15 


CHICAGO,  ST.  PAUL,  MINNEAPOLIS  AND 
OMAHA  RAILWAY. 

The  "Omaha,"  as  it  is  familiarly  known,  is  in  reality  simply 
a  part  of  the  Chicago  and  North  Western  system,  and  since  1883 
has  been  practically  operated  as  a  part  of  the  larger  road.  It, 
however,  reports  separately. 

The  road  was  formed  through  the  consolidation  in  1880,  of 
the  Chicago,  St.  Paul  and  Minneapolis,  the  St.  Paul  and  Sioux 
City,  and  the  North  Wisconsin  railroads.  It  operates  1,693  miles 
of  road,  running  in  a  southwesterly  direction  from  Ashland  and 
Duluth  on  Lake  Superior  through  St.  Paul  and  Minneapolis,  to 
Sioux  City  and  into  Nebraska. 

Of  its  $29,818,864  of  capital  stock,  $14,700,000  is  owned  by 
the  Chicago  and  North  Western.  This  is  almost  an  even  half,  and 
with  a  few  shares  owned  by  the  directors,  makes  up  a  controlling 
interest. 

Nine  of  its  thirteen  directors  come  from  the  North  Western 
board.  The  other  four  include  Eugene  E.  Osborn,  vice-presi- 
dent and  general  secretary,  New  York,  Thomas  Wilson,  general 
counsel,  St.  Paul;  John  M.  Whitman,  Chicago;  and  John  A. 
Humbird,  St.  Paul. 

The  executive  committee  is  made  up  entirely  in  the  Vander- 
bilt  interest,  four  of  its  seven  members  being  Vanderbilt  directors, 
and  likewise  belonging  to  the  New  York  Central  and  Lake 
Shore  boards. 

In  1905,  the  Omaha  reported  1,045  stockholders. 

Capitalization. 

The  capital  account  of  the  road  on  June  30,  1906,  stood 
as  follows: 

Common  stock  outstanding $18,558,953 

Preferred  stock  outstanding 11,259,911 

Total  stock   $29,818,864 

(226) 


CHICAGO,  ST.  PAUL,  MINNEAPOLIS  &  OMAHA    227 
Bonded  Debt  (net) $27,096,800 

Nominal  capital  $56,915,664 

Rentals  cap.  at  4%   3,087,500 

Approximate  gross  capitalization  $60,003,164 

Securities  held   362,752 

Approx.  net  capitalization $59,640,412 

Approx.   net   capital,    per   mile $35,227 

Average  miles  operated 1,693 

Net   earnings  on   net  capitalization    .  .  8.8% 

Stock  on  net  capitalization 50% 

Fixed  Charges  on  Total  Net  Income  . .  42% 

Factor    of    Safety    58% 

The  capitalization  per  mile  of  road  is  slightly  higher  than 
that  of  the  North  Western,  and  the  net  earnings  show  a  slightly 
lower  percentage  of  the  estimated  net  capitalization,  the  8.8% 
on  the  Omaha  comparing  with  10.5%  on  the  North  Western,  and 
with  9.7%  on  the  St.  Paul. 

The  Fixed  Charges  consume  only  42%  of  the  total  net  in- 
come, leaving  a  wide  margin  of  safety  for  the  securities  of  the 
road. 

The  amount  of  preferred  stock  is  not  large,  so  that  the 
margin  of  safety  on  the  dividends  on  this  stock  is  also  ample. 

The  company  holds  in  its  treasury  $2,844,000  of  common 
stock,  $1,386,000  of  preferred,  and  $805,000  of  its  own  bonds. 
These  have  not  been  included  in  the  estimate  of  capitalization. 
Likewise  the  treasury  holds  $50,000  of  Sault  Ste.  Marie  and 
Southwestern  first  mortgage  bonds,  and  $1,500,000  of  Superior 
Short  Line  Railway  bonds. 

As  these  are  carried  as  liabilities  in  the  balance  sheet,  they 
have  likewise  not  been  included  in  the  securities  held  or  deducted 
from  the  estimated  capitalization. 

The  balance  of  the  company's  holdings  are  very  small  and 
represent  no  equities  worth  mentioning. 

Since  the  control  of  the  road  was  obtained  by  the  North 
Western  in  1882,  its  capitalization  has  remained  practically  stati- 
onary, and  in  fifteen  years  the  funded  debt  has  slightly  increased. 


228    CHICAGO,  ST.  PAUL.  MINNEAPOLIS  &  OMAHA 

Stability  of  Earnings. 

In  the  six  years  from  1900,  the  gross  earnings  increased  25%, 
and  the  earnings  per  mile  about  15%,  as  the  following  table 
indicates : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1900 

1,544 

$10,342,900 

S6.698 

1901 

1,574 

11,196,404 

7,113 

1902 

1,605 

11,907,525 

7,240 

1903 

1,660 

12,055,271 

7,261 

1904-5 

1,683 

11,926,000 

7,087 

1905-6 

1,693 

12,943,750 

7,645 

Maintenance. 

The  traffic  density  of  the  road  is  considerably  under  that 
of  the  North  Western,  but  its  average  for  maintenance  of  way 
has  been  higher  than  that  of  the  larger  road.  The  average 
expenditure  for  equipment  has  been  somewhat  lower  than  the 
North  Western's,  but  the  total  for  maintenance  per  mile  has  been 
larger.    The  items  follow  : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way            Equipment 

1900 

1901 

1902 

1903 

1904-5 

1905-6 

489,466 
522,963 
529,374 
538,628 
520,031 
517,077 

519,589 

$1,228 

1,269 

1,207 

1,010 

821 

959 

S592 
680 
657 
691 
685 
714 

SI, 820 
1,949 
1,864 
1,701 
1,506 
1,673 

Average 

$1,083 

$669 

$1,752 

Mileage  extra  track,  42. 

Improvements. 

In  addition  to  the  regular  appropriations  for  maintenance, 
the  road  has  followed  the  usual  Vanderbilt  custom  of  setting 
aside  funds  from  the  surplus  earnings  for  improvements.  These, 
in  the  last  seven  years,  have  averaged  slightly  above  $500,000 
per  year.  In  1906  the  sum  set  aside  was  $600,000  as  against 
$-KXX000  in  1905. 


CHICAGO,  ST.  PAUL,  MINNEAPOLIS  &  OMAHA    229 


Surplus. 
As  part  of  a  prosperous  system,  the  road  has  heen  able  to 
show  fairly  liberal  maintenance  charges,  and  still  have  a  com- 
fortable surplus  for  the  payment  of  its  dividends.    The  following 
shows  the  annual  surplus  before  the  improvement  fund  has  been 


charged  off. 

Year 

Surplus 

Dividends 

Paid  on 

Preferred 

Per  Cent. 

Earned  on 

Common 

Dividends 
Paid  on 
Common 

Average 
Price 

1901 

1902 

1903 

1904-5* 

1905-6 

$2,729,252 
2,918,336 
2,751,726 
2,641,130 
3,018,140 

7 
7 
7 
7 
7 

10.5 
11.5 
10.6 
10 

5 
6 
6 

7 
7 

136 
155 
139 
147 

188 

*Fiscal  year  charged 

Dividend  Record 

The  dividend  record  is  as  follows: 
Year. 
1881-4. 
1885... 
1886-8 . 
1889... 
1890-1  . 
1892.., 
1893-6 
1897-8 . 
1899. . 
1900-1 , 
1902-4 . 
1905-6 . 

The  Balance  Sheet. 
At  the  close  of  the  fiscal   year  of   1906,   the  balance   sheet 
showed : 

Current  assets    $2,270,405 

Current   liabilities    3,022,215 


irred. 

Common. 

7 

m 

6 

3 

4 

6y2 

7 

2 

7 

W 

7 

5 

7 

6 

7 

7 

Leaving  an  adverse  balance  of    $751,810 


To  this  should  be  added  $897,819  balance  of  improvement  funds 
which  was  not  apparently  represented  in  the  quick  assets.  The 
same  is  true  of  the  $3,034,489  to  credit  of  Profit  and  Loss,  and 
the  Land  Income  Account.  The  road  was  therefore  in  need  of 
working  capital. 


230    CHICAGO,  ST.  PAUL,  MINNEAPOLIS  &  OMAHA 

Investment  Value. 

The  preferred  stock  has  a  prior  right  to  dividends  up  to  7%, 
but  the  common  cannot  receive  more  than  is  paid  on  the  pre- 
ferred; in  other  words,  above  7%  the  two  stocks  share  alike. 

The  7%  on  the  preferred,  after  having  been  paid  in  the 
prosperous  years  of  the  early  eighties,  was  cut  down  until,  in 
1893-6,  it  disappeared  entirely.  It  was  resumed  in  1897  and  since 
paid  continuously  ;  that  is  to  say,  for  eight  years.  There  seems 
to  be  every  prospect  for  its  continuance  indefinitely.  The  amount 
of  the  preferred  is  small,  and  the  amount  earned  on  the  common 
over  the  preferred  dividends  for  five  or  six  years  has  averaged 
above  10%.  This  has  left  a  very  ample  margin  for  the  pre- 
ferred, and  it  may  therefore  be  regarded  as  one  of  the  solidest 
7%  stocks  on  the  market.  Prospects  disregarded,  with  money 
at  4%,  it  is  entitled  to  sell  at  around  $175  per  share.  As  a 
matter  of  fact  it  has  sold  considerably  above  this,  rising  to  $230 
per  share  in  the  year  1905.  It  is  fairly  clear  that  this  high  price 
was  based  upon  prospects  for  an  increased  dividend.  It  is 
equally  clear  from  the  returns,  that  no  such  increase  was  immedi- 
ately in  view.  Even  in  the  exceptionally  prosperous  year  of  1906, 
the  net  surplus,  after  charging  off  the  improvement  fund,  and 
dividends,  amounted  to  only  $331,000,  which  was  equivalent  to 
only  a  little  over  one  per  cent,  on  the  total  stock  outstanding. 
With  a  road  whose  balance  sheet  shows  it  to  be  in  need  of  cash 
working  capital,  it  is  hardly  likely  that  every  copper  of  the 
surplus  would  be  paid  out. 

The  maintenance  charges  of  the  Omaha  are  fairly  heavy, 
compared  with  other  western  roads,  and  possibly  conceal  some 
earnings.  On  the  other  hand  the  Vanderbilt  policy  is  distinctly 
not  in  the  direction  of  high  dividends  but  rather  towards  heavy 
improvements.  The  surplus  shown  in  five  or  six  years  has 
varied  very  little,  making  it  evident  that  the  maintenance  charges 
have  been  adjusted  to  earnings. 

Inless  this  policy  should  be  radically  changed  it  is  probable 
that  the  dividend  on  the  preferred  will  remain  as  in  the  ten  years 
from  1897. 

This  is  likewise  true  of  the  dividend  on  the  common.  It 
was  only  begun  in  1897,  and  7c/c  has  been  paid  only  from 
1905.     The  common   shares  equally  with   the  preferred,  and   in 


CHICAGO,  ST.  PAUL,  MINNEAPOLIS  &  OMAHA    231 

order  that  it  should  have  an  additional  one  per  cent.,  this  would 
have  to  be  paid  on  the  entire  amount  of  stock  outstanding. 

On  the  other  hand  the  road  is  prosperous,  the  maintenance 
charges  are  ample,  and  the  surplus  shown  easily  provides  for 
the  7%  dividend  on  the  common,  with  something  left  over.  The 
common  may  therefore  be  regarded  as  a  fairly  solid  7%  stock, 
with  excellent  prospects  should  prosperity  continue.  On  this 
basis  it  would  probably  be  regarded  by  investors  as  an  attractive 
purchase  at  from  $140  to  $160  per  share.  Since  it  was  put  on 
a  7%  basis,  it  has  sold  as  high  as  $225,  in  January,  1905.  It 
sold  down  to  $120  per  share  in  the  general  decline  of  1907. 


THE  CINCINNATI,  HAMILTON  AND  DAYTON 

RAILWAY. 

The  Cincinnati,  Hamilton  &  Dayton  in  1904-5  was  the  central 
company  in  the  big  merger  of  that  road,  the  Pere  Marquette 
and  the  Chicago,  Cincinnati  &  St.  Louis,  which  was  to  form 
the  Great  Central  system.  Within  a  little  more  than  a  year  from 
the  date  of  the  combination,  it  passed  into  the  hands  of  a 
receiver  and  the  system  was  dismembered. 

The  Cincinnati,  Hamilton  &  Dayton  operates  a  main  line 
from  Cincinnati  to  Toledo  with  branches  to  Ironton  on  the 
Ohio  River  and  westward  through  Indianapolis  to  Springfield, 
111.     In  1906  it  operated  an  average  of  1,038  miles. 

The  present  company  represents  the  consolidation  in  1895  of 
the  old  Railroad  company  with  the  Cincinnati,  Dayton  &  Ironton 
and  the  Cincinnati,  Dayton  &  Chicago.  The  Indiana,  Decatur  & 
Western  was  afterwards  acquired.  It  leases  the  Dayton  &  Michi- 
gan. The  road  was  chartered  in  1846  and  the  main  line  opened 
in  1851.  It  has  had  a  checkered  career  and  illustrates  the  principle 
of  heredity  in  railroad  management  which  has  frequently  been 
dwelt  upon  in  these  pages. 

In  1882  President  Jewett  and  his  associates  of  the  Erie  Rail- 
road acquired  control,  through  a  guarantee  of  dividends  on  the 
stock  which  they  were  afterwards  unable  to  fulfill.  In  1887  the 
road  fell  into  the  hands  of  the  notorious  "Napoleon"  Ives,  who, 
after  running  the  printing  press  overtime  for  the  issue  of  new 
stock,  came  to  a  spectacular  smash  in  August  of  that  year.  It 
was  probably  one  of  the  few  times  in  the  history  of  the  Stock 
Exchange  that  a  disaster  was  greeted  with  cheers. 

In  1904  a  new  element  came  into  control,  with  ambitious 
designs.  Apparently  for  the  purpose  of  reducing  the  amount  of 
capital  required  to  control  the  road,  $6,925,500  of  the  5%  pre- 
ferred and  all  of  the  $1,074,500  of  the  4%  preferred  was  bought 
in  by  the  company  at  the  rate  of  $110  for  the  first  and  $100  for 
the  second.    Gold  notes  to  the  amount  of  $15,000,000  were  issued ; 

(232) 


CINCINNATI,  HAMILTON  &  DAYTON  233 

and  in  the  same  year  $12,834,450  par  value  of  the  $16,000,000 
outstanding  common  stock  of  the  Pere  Marquette  and  $1,487,800 
of  the  outstanding  $12,000,000  of  preferred  of  the  same  road  was 
purchased. 

For  the  common  stock  $125  per  share  was  paid,  the  pur- 
chase apparently  being  made  principally  on  a  report  dated  May 
16,  1904,  presented  to  the  directors  by  Jabez  T.  Odell,  Vice- 
President  of  the  Pittsburg,  Bessemer  &  Lake  Erie.  In  that  year 
4%  had  been  paid  on  the  Pere  Marquette  preferred  and  1%  on 
the  common.  Reference  to  the  analysis  of  the  Pere  Marquette 
will  reveal  that  in  order  to  pay  these  dividends,  maintenance 
charges  and  operating  expenses  generally  had  been  cut  down  to 
a  minimum,  and  that  had  these  charges  been  up  to  the  standard 
of  other  roads  in  the  same  section,  practically  no  surplus  would 
have  been  shown.  In  proof  of  this  it  is  sufficient  to  note  that  in 
the  year  following  the  purchase — that  is,  in  1905 — under  the 
management  of  so  capable  a  railroad  official  as  Russell  Harding, 
on  an  increase  of  a  million  and  a  quarter  of  dollars  in  gross 
earnings,  net  earnings  showed  a  decrease  of  nearly  one  million 
dollars.  It  does  not  appear  that  the  combination  of  the  two  roads 
was  of  any  advantage  to  either,  for  the  gross  earnings  of  the  Cin- 
cinnati, Hamilton  &  Dayton  for  1905,  following  the  purchase, 
showed  a  decrease  rather  than  a  gain,  and  the  Pere  Marquette 
increase  was  slight.  In  other  words,  the  Cincinnati,  Hamilton  & 
Dayton  paid  $125  per  share  for  $12,000,000  and  over  of  common 
stock,  on  which  nothing  was  legitimately  being  earned  and  from 
which  no  other  advantages  apparently  were  derived. 

On  January  12th  of  1905,  the  lease  of  the  Pere  Marquette 
for  999  years  was  formally  ratified,  the  C.  H.  &  D.  guaranteeing 
4%  on  the  preferred  stock  of  the  Pere  Marquette  and  five  per 
cent,  on  the  common. 

For  the  fiscal  year  of  1905  the  C.  H.  &  D.  showed  a  deficit 
and  on  December  4th  a  receiver  was  appointed.  The  board  of 
directors  which  performed  this  brilliant  feat  of  railway  finance 
was,  as  given  in  the  report  of  1905,  published  later  by  the  receiver, 
as  follows :  Eugene  Zimmerman  of  Cincinnati,  president ;  Rus- 
sell Harding,  vice-president;  Joseph  B.  Foraker,  United  States 
Senator  from  Ohio ;  James  N.  Wallace  of  the  Central  Trust  Co., 
New  York ;  Frederick  L.  Eldredge,  Arthur  Turnbull,  Alfred  Skitt, 
Richard  N.  Young,  all  of  New  York;  Thomas  H.  Tracy,  and 
James  J.  Robison  of  Toledo ;  Wm.  L.  Dechant  of  Middletown, 


234  CINCINNATI,  HAMILTON  &  DAYTON 

Ohio;  and  Charles  A.  Otis,  Cleveland.  The  executive  committee 
consisted  of 

Eugene  Zimmerman  James  N.  Wallace 

Thomas  H.  Tracy  Arthur  Turnbull 

In  September,  1905,  through  J.  P.  Morgan  &  Co.,  the  Erie 
Railroad  arranged  to  acquire  control  by  purchase  of  about  $5,000,- 
000  of  stock,  "but  the  obligations  of  the  Cincinnati,  Hamilton  & 
Dayton  under  lease  and  under  other  contracts  being  found  un- 
duly heavy,  Mr.  Morgan  in  November,  1905,  relieved  the  Erie  of 
its  purchase."  The  price  which  the  Erie  Railroad  was  to  pay 
for  the  stock  of  this  road,  which  for  the  fiscal  year  1905  closing 
June  30th,  had  shown  a  deficit,  and  which  one  month  after  it 
had  been  returned  to  the  Morgan  interests  was  placed  in  the 
hands  of  a  receiver,  was  one  hundred  and  sixty  dollars  per  share. 

In  an  action  brought  by  Homer  Lee  against  Henry  F.  Shoe- 
maker, Chairman  of  the  Board  of  Directors  of  the  Cincinnati, 
Hamilton  &  Dayton,  Eugene  Zimmerman  of  Cincinnati,  and  H. 
B.  Hollins  &  Co.,  of  New  York,  $2,000,000  was  claimed  as  due 
on  the  profits  of  the  merger  of  the  Pere  Marquette  and  the  C.  H. 
&  D.  The  complaint  asserted  that  Lee  and  Wm.  J.  Hiland  were 
instrumental  in  adjusting  the  deal  by  which  the  merger  was  put 
through  and  that  the  profits  amounted  to  $20,000,000,  of  which 
it  was  agreed  they  should  receive  10%.  This  suit  was  discon- 
tinued under  a  stipulation  signed  by  all  the  parties  under  action 
before  being  brought  to  trial. 

In  1906  the  lease  of  the  Pere  Marguette  was  set  aside  and 
the  two  roads  again  operated  separately. 

The  directorate  as  given  in  the  report  of  1906  was  composed 
of  George  W.  Perkins,  of  J.  P.  Morgan  &  Co.,  Chairman  of  the 
Board;  F.  D.  Underwood,  president  of  the  Erie,  president; 
Samuel  Spencer,  Henry  F.  Shoemaker,  Charles  Steele,  George  F. 
Baker,  George  W.  Young,  Norman  B.  Ream,  all  of  New  York ; 
R.  R.  Rhodes,  J.  H.  Clarke,  C.  A.  Otis,  Jr.,  of  Cleveland;  W.  L. 
Dechant  of  Middletown,  Ohio ;  and  N.  Monsarratt  of  Columbus, 
Ohio. 

In  1905  the  road  reported  1,558  shareholders. 

Capitalization. 

Practically  all  of  the  preferred  stock  was  bought  in  under 
the  arrangement  noted  above,  at  $110  and  $100  per  share  and  on 
June  30th,   1906,  the  Central  Trust  Co.,  of  New  York  had  on 


CINCINNATI,  HAMILTON  &  DAYTON  235 

deposit  for  the  purchase  of  this  stock  $8,645,026.  In  the  following 
table  this  latter  amount  has  been  included  under  the  item  of 
securities  held,  and  deducted  from  the  gross  capitalization  shown. 

Common  stock $8,000,000 

Preferred  stock 8,000,000 

Total    stock    $16,000,000 

Funded  debt   (net,  including  Leased  & 

Auxiliary  Co.'s)    47,944,000 

Leased  Lines  Guar.  Stock   3,713,200 

Equip.  Obligations  (Inc.  leased  lines) .  .  2,784,000 

Receiver's     Certificates 511,830 

Total  Capital    $70,953,030 

Securities    held    $29,814,266 

Approx.  net  capital   $41,138,784 

Approx.  net  capital  per  mile   $39,627 

Average  miles  operated 1,038 

Net  earnings  on  net  capital 4.8% 

Stock  on   net   capital    36% 

Fixed  Charges  on  Total  net  Income 147% 

Factor  of  Safety 

In  the  item  of  securities  held  given  above  is  included  $16,- 
570,273  book  value  of  a  liability  interest  in  the  stocks  owned  by 
the  Michigan  Security  Company.  This  apparently  includes  the 
$12,000,000  par  value  Pere  Marquette  common  stock  purchased 
at  $125  per  share.  Inasmuch  as  the  Pere  Marquette  in  1906 
earned  a  deficit  and  the  $16,000,000  of  outstanding  common  stock 
comes  behind  $12,000,000  of  preferred  stock,  it  is  evident  that 
this  stock,  figured  at  the  price  which  the  common  stock  of  bank- 
rupt roads  is  usually  worth,  from  $10  to  $20  per  share, — 
represented  a  corresponding  loss  to  the  shareholders  of  the 
Cincinnati,  Hamilton  &  Dayton.  The  entire  Other  Income  of 
the  C.  H.  &  D.  for  1906  was  only  $120,735. 

The  actual  net  capital  of  the  company  was  therefore  some 
$10,000,000  or  $12,000,000,  or  more  than  25%  higher  than  as 
indicated  by  the  table  above,  and  the  approximate  net  capitali- 
zation was  actually  above  $50,000  per  mile.     As  the  larger  part 


Y 


236 


CINCINNATI,  HAMILTON  &  DAYTON 


of  this  was  in  bonds,  etc.,  this  on  a  road  earning  $8,000  per  mile, 
was  a  heavy  load.  Even  under  the  very  remarkable  manage- 
ment displayed  by  Receiver  Judson  Harmon,  in  the  prosperous 
year  of  1906,  net  earnings  really  amounted  to  less  than  4%  on 
the  estimated  net  capital. 

The  deficit  shown  for  the  year  was  $1,147,630,  equal  to 
nearly  one  and  a  half  times  the  Total  Net  Income. 

Character  and  Stability  of  Traffic. 

Passenger  traffic  contributed  in  1906  about  22%  of  the  gross 
earnings.  Of  the  freight  tonnage  44%  was  products  of  mines, 
12%  lumber,  etc.,  15%  farm  products,  14%  manufactures. 

The  mileage  and  earnings  of  the  road  over  a  period  of 
rears  have  shown  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896-7 

652 

$4,627,352 

$7,101 

1897-8 

652 

4,908,563 

7,533 

1898-9 

652 

5,241,503 

8,044 

1899-0 

652 

5,735,531 

8,802 

1900-1 

652 

5,837,916 

8,953 

1901-2 

652 

6,352,164 

9,741 

1902-3 

1,015 

7,997,223 

7,878 

1903-4 

1,015 

8,104,831 

7,985 

1904-5 

1,032 

8,008,917 

7,760 

1905-6 

1,038 

8,398,417 

8,090 

In  the  receiver's  report  for  1906  attention  is  drawn  to  the 
fact  that  the  statement  of  earnings  for  1906  "included  actual 
earnings  only,  while  the  statement  for  1905  included  items  which 
were  not  earnings.  For  instance,  in  June,  1905,  $106,086  of- 
overcharges  paid  in  1905,  on  business  done  before  July  1st,  1904. 
was  credited  to  freight  earnings  for  that  month,  and  charged 
directly  to  profit  and  loss."  This  was  under  the  Zimmerman 
administration. 

It  will  be  seen  that  although  the  gross  earnings  have  in- 
creased considerably,  this  was  due  to  additional  mileage  and 
the  mileage  earnings  have  shown  considerable  decline  from  1902, 
when  they  reached  nearly  $10,000  per  mile. 

Maintenance. 


From  1900  the  charges  to  maintenance  have  been  as  follows : 


CINCINNATI,  HAMILTON  &  DAYTON 


237 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

954,371 
1,041,538 
813,376 
776,448 
816,070 
905,209 

917,835 

$870 
876 
773 
767  > 
876 

1,101 

$877 

$941 
1,081 
911 
1,063 
1,165 
1,353 

$919 

$1,811 
1,957 
1,684 
1,830 
2,041 
2,454 

Average 

$1,796 

Wabash 

Tol.  &  0.  C. 
Lake  E.  &  W. .  . 

910,426 

880,032 

1,423,424 

592,307 

$1,184 

1,332 

1,225 

999 

$1,693 

1,370 

1,471 

733 

$2,877 
2,702 
2,696 
1,732 

The  C.  II.  &  D.  is  a  normal  or  typical  railroad,  similar  to 
others  in  its  vicinity  and  it  might  readily  be  supposed,  therefore, 
that  its  average  maintenance  charges  would  be  about  the  same 
as  its  competitors.  Reference  to  the  above  table  shows,  how- 
ever, that  the  Vandalia  and  the  Wabash,  with  approximately 
the  same  traffic  density,  spent  in  the  six  years  under  view  an 
average  of  about  $1,000  per  mile  more.  The  Lake  Erie  & 
Western,  with  about  two-thirds  the  traffic  density  spent  as  much 
as  the  C.  H.  &  D.  There  was  nothing  in  the  superior  physical 
condition  of  the  road  to  make  it  possible  to  operate  the  C.  H. 
&  D.  on  such  a  standard  of  maintenance  and  had  its  standard 
been  up  to  the  level  of  other  roads  in  the  same  section,  the  added 
charges  would  have  wiped  out  the  larger  part  of  the  nominal 
surplus  shown  from  1891  to  1905. 

Surplus  Earnings. 

As  it  was,  the  nominal  surplus  shown  was  as  follows : 

1900-1    '. $756,363 

1901-2    947,264 

1902-3   1,161,151 

1903-4   793,530 

1904-5    *241,224 

1905-6   *1, 147,630 

^Deficit. 

It  will  be  seen  that  in  1905,  under  the  Zimmerman  adminis- 
tration, the  company  showed  a  deficit  of  $241,224.    Only  $192,921 


238  CINCINNATI,  HAMILTON  &  DAYTON 

of  this  was  due  to  increase  in  rentals  paid  under  the  lease  of 
the  Pere  Marquette.  It  was  on  the  showing  made  during  this 
year  that  it  was  proposed  in  the  September  following  to  sell 
five  millions  of  this  common  stock  to  the  Erie  Railroad  at  $160 
per  share. 

i  Condition. 

Receiver  Judson  Harmon  took  charge  of  the  property  on 
Dec.  4th,  1905,  and  the  report  for  1906  included  seven  months 
of  operation  under  his  receivership.  Gross  earnings  for  the 
year  showed  an  increase  of  $389,500.  This  was  in  the  face  of 
a  decline  in  the  average  rate  per  ton  mile  of  from  .67c.  to  .63c. 
Owing  to  the  increase  in  operating  expenses,  net  earnings  were 
slightly  less  than  in  1905.  This  was  wholly  due  to  an  increase 
in  maintenance  charges  which  were  about  $550,000  more  in  1906 
than  in  1905. 

In  the  face  of  an  increase  of  nearly  100,000,000  ton  miles 
of  revenue  freight  carried,  and  the  generally  higher  cost  of 
materials  and  labor,  the  cost  of  conducting  transportation  de- 
clined slightly;  in  other  words,  while  this  item  was  61%  of 
the  operating  expenses  in  1905,  it  was  56.7%  in  1906. 

There  was  an  apparent  increase  of  $176,133  in  taxes,  but 
the  report  states  that  "this  was  chiefly  due  to  the  charging  of 
an  omitted  half  year's  taxes  to  bring  the  accruals  to  June  30th, 
1906."  In  other  words,  this  item  might  legitimately  be  deducted 
from  the  deficit  shown  in  1906  and  added  to  that  shown  in  1905. 

The  report  states  that  the  greater  part  of  the  increase  of 
$812,143  in  interest  charges  was  caused  by  the  addition  of  $490,- 
000  interest  on  the  $15,000,000  of  collateral  trust  notes  issued  in 
part  to  acquire  in  the  company's  4%  preferred  stock  at  $110  per 
share  and  to  secure  control  of  the  Pere  Marquette,  and  $312,000 
interest  on  the  4%  refunding  mortgage  of  July  1st,  1904. 

The  report  of  the  receiver  in  1906  states  what  the  report  of 
1905,  made  up  by  the  company,  did  not  state :  that  on  the 
$8,250,000  of  refunding  mortgage  bonds  which  were  issued  and 
drew  interest  from  July  1st,  1904,  only  four  months'  interest 
was  charged  to  income  account,  "the  remainder  being  charged 
to  Capital  Account." 

The  report  further  states  that  the  interest  on  the  $15,000,000 
collateral  trust  notes  was  charged  for  the  full  year,  although 
no  payments  have  been  made  thereon  since  September,  1905. 


CINCINNATI,  HAMILTON  &  DAYTON  239 

From  December  4th,  1905,  to  the  close  of  the  fiscal  year, 
receiver's  certificates  to  the  amount  of  $511,830  were  issued. 

In  further  evidence  of  the  able  and  energetic  management  of 
the  road  under  the  receivership,  it  may  be  noted  that  the  number 
of  revenue  freight  tons  per  train  mile  rose  from  301  tons  to  371 
tons,  and  that  the  average  earnings  per  freight  train  mile  rose 
from  $2.04  to  $2.30  in  the  face  of  the  decline  noted  above  of 
the  average  freight  rate  from  .67c.  to  .63c. 


CINCINNATI,  NEW  ORLEANS  AND  TEXAS 
PACIFIC  RAILWAY. 

(Lessee  of  the  Cincinnati  Southern  Ry.) 

The  Cincinnati,  New  Orleans  &  Texas  Pacific  comprises  part 
of  what  is  known  as  the  Queen  &  Crescent  route,  which  operates 
a  series  of  roads  from  Cincinnati  to  New  Orleans.  The  Cincinnati, 
New  Orleans  &  Texas  Pacific  owns  no  track,  but  operates  under 
lease  the  Cincinnati  Southern,  which  is  owned  by  the  City  of 
Cincinnati.  In  1901  the  existing  lease  was  extended  60  years, 
the  rental  under  renewal  being  $1,050,000  annually  for  the  first 
twenty  years. 

The  road  is  controlled  by  the  Southwestern  Construction 
Company,  in  the  joint  interest  of  the  Southern  Railway  and  the 
Cincinnati,  Hamilton  &  Dayton,  and  operates  a  total  of  336 
miles,  from  Cincinnati  to  Chattanooga.  As  of  June  30th,  1906, 
it  had  outstanding  the  following  securities : 

Common  stock $3,000,000 

Preferred    Stock    2,000,000 

Equipment  Trust  Obligations 2,926,288 

5%  Gold  Notes   . : 1,500,000 

Total  Capital $9,426,288 

For  the  year  1906  the  road  showed : 

Gross  Earnings    $8,454,896 

Net    Earnings " 2,062,224 

During  the  year  $440,825  was  put  into  permanent  improve- 
ments, which  revert  to  the  lessor  company  at  the  conclusion  of 
the  lease. 

On  traffic  density  amounting  in  1906  to  2,650,162  ton 
miles  there  was  expended  for  maintenance  of  way,  $4,900  per  mile 
and  for  maintenance  of  equipment,  $4,274  per  mile.  This  high 
standard  of  charges  was  not  greatly  above  that  obtained 
on    the    road    for    several    years.     This    is    more    than    three 

(240) 


CINCINNATI,  NEW  ORLEANS  &  TEXAS  PACIFIC  241 

times  the  average  maintenance  of  the  Louisville  &  Nashville, 
the  Illinois  Central  and  the  Chicago  &  Alton,  and  with  a  traffic 
density  of  about  two  and  one-half  times  as  great  as  these  roads, 
it  would  appear  that  this  maintenance  charge  is  extremely  liberal, 
and  probably  conceals  considerable  earnings. 

After  the  payment  of  fixed  charges  and  the  permanent  im- 
provements, there  remained  a  balance  of  income  over  charges  of 
$387,764.  If  the  excess  of  maintenance  represented  no  more 
than  $2,000  per  mile,  this  nominal  surplus  could  have  readily 
been  increased  to  in  the  neighborhood  of  $1,000,000.  This,  over 
the  5%  dividends  on  the  preferred,  would  have  left  $900,000 
available  for  dividends  on  the  $3,000,000  of  preferred  stock,  or 
the  equivalent  of  about  30%. 

It  will  be  seen,  therefore,  that  the  5%  dividend  paid  on  the 
common  stock  in  1906  was  very  amply  protected  and  might 
readily  have  been  doubled  or  tripled. 

The  preferred  stock  is  5%  cumulative  but  without  voting 
rights.  It  is  apparently  as  amply  protected  as  to  its  dividend  as 
any  stock  on  the  market. 


16 


CLEVELAND,  CINCINNATI,  CHICAGO  AND 
ST.  LOUIS  RAILWAY. 

The  "Big  Four,"  as  it  is  familiarly  known,  is  the  western- 
most member  of  the  New  York  Central-Lake  Shore  group  of 
roads,  and  extends  the  system  from  Cleveland  westward  and 
southward  to  Cincinnati,  Indianapolis,  Peoria,  St.  Louis,  and 
Cairo.  It  has  long  been  a  member  of  the  Vanderbilt  system, 
but  was  formerly  operated  by  a  somewhat  separate  set  of 
officers.  With  the  retirement  of  M.  E.  Ingalls  as  president,  its 
chief  executive  officers  are  now  the  same  as  for  the  rest  of  the 
system.  In  1906  it  operated  1,983  miles  of  main  track  through  Ohio, 
Indiana,  and  Illinois,  with  218  miles  of  second  track. 

History. 

The  road  represents  the  consolidation  in  1889  of  the  Cincin- 
nati, Indianapolis,  St.  Louis  and  Chicago,  the  Cleveland,  Col- 
umbus, Cincinnati  and  Indianapolis,  and  the  Indianapolis  and 
St.  Louis  railroads.  The  reorganization  took  place  in  the  Vander- 
bilt interest.  In  the  following  year  the  St.  Louis,  Alton  and 
Terre  Haute  was  absorbed,  and  later  the  Cincinnati,  Sandusky 
and  Cleveland  and  several  other  small  roads,  which  extended 
the  line  to  its  present  proportions. 

Ownership. 

A  working  control  of  the  capital  stock  is  owned  by  the 
Lake  Shore,  in  the  Vanderbilt  interest,  the  Lake  Shore  holding 
Jan.  1,  1907,  $23,148,100  of  a  total  of  $50,000,000  stock  outstanding. 
The  directorate  was  chiefly  made  up  of  Vanderbilt  directors,  as 
follows :  William  K.  Vanderbilt,  Frederick  W.  Vanderbilt,  H. 
McK.  Twomblv,  William  H.  Newman,  and  Chauncey  M.  Depew. 
The  Chairman  of  the  board  is  Melville  E.  Ingalls,  long  the  presi- 
dent of  the  road,  and  the  other  directors  of  1906  were  James  D. 
Layng,  vice-president;  J.  Pierpont  Morgan,  Walter  P.  Bliss, 
James  Barnett,  and  Alexander  McDonald.     Despite  the  fact  that 

(242) 


CLEVELAND,  CINCINNATI,  CHICAGO  &  ST.  LOUIS  243 

the  majority  portion  of  the  stock  is  thus  owned,  the  road  had  in 
1905,  1,965  shareholders. 

Affiliations. 

The  Big  Four  is  a  direct  feeder  for  the  Lake  Shore.  Aside 
from  its  association  with  other  Vanderbilt  roads,  the  Big  Four 
owns  a  majority  of  the  $10,000,000  capital  stock  of  the  Peoria 
and  Eastern  Railroad,  and  guarantees  the  interest  on  that  com- 
pany's bonds ;  owns  a  majority  of  the  stock  of  the  Cincinnati  and 
Northern;  is  part  owner  in  various  terminals  at  St.  Louis  and 
other  points.  Through  the  Peoria  and  Eastern  it  owns  one 
fourth  of  the  Peoria  and  Pekin  Union  Railway ;  and  jointly 
with  the  Chesapeake  and  Ohio,  it  guarantees  the  interest  on  the 
Louisville  and  Jeffersonville  Bridge  bonds.  As  on  January  1st, 
1905,  it  held  stock  in  the  Chesapeake  and  Ohio  Railroad  carried 
on  the  books  at  a  valuation  of  $2,453,570.  The  Central  Indiana 
Railway  is  jointly  controlled  by  the  Big  Four  and  the  Penn- 
sylvania. 

Capitalization. 

Including  the  increase  of  about  $4,500,000  common  stock, 
sold  in  1906,  the  capitalization  of  the  road  Jan.  1,  1907,  stood  as 
follows : 

Common  Stock $40,000,000 

Preferred  Stock 10,000,000 

Total  $50,000,000 

Funded  Debt 63,612,727 

Total   Capital $113,612,727 

Rentals  capitalized  at  4%  7,132,325 

Approx.  gross  capitalization $120,745,052 

Securities  held   4,988,383 

Approx.  net  capitalization $115,756,669 

Approx.  net  capit.  per  mile $58,374 

Aver,  miles  operated 1,983 

Net  earnings  on  net  capital 5.3% 

Stock  on   net  capitalization 43% 


244  CLEVELAND,  CINCINNATI,  CHICAGO  &  ST.  LOUIS 

Fixed  Charges  on  Total  Net  Income.  .  69% 

Factor  of   Safety 31% 

The  estimated  capitalization  per  mile,  $58,374,  compares 
with  $78,987  for  the  Lake  Shore,  $69,150  for  the  Wabash,  and 
$101,311  for  the  Panhandle. 

Its  net  earnings  on  the  estimated  net  capital  were  low, 
amounting  to  only  5.3%,  as  against  3.9%  for  the  Wabash,  12.7% 
for  the  Lake  Shore,  and  6.6%  for  the  Panhandle;  that  is  to  say, 
its  capitalization  is  high  as  compared  with  its  earnings. 

The  stock  represents  43%  of  the  estimated  net  capitaliza- 
tion, as  compared  with  41%  for  the  Lake  Shore,  and  31%  for 
the  Panhandle. 

Fixed  Charges  in  1906  consumed  69%  of  the  total  net  income, 
as  against  38%  for  the  Lake  Shore  and  54%  for  the  Panhandle. 

The  Factor  of  Safety  on  the  underlying  securities  and  guar- 
anties was  not  large. 

Equities. 

In  1906  stocks  and  bonds  were  owned  of  a  book  valuation  of 
$4,988,388,  the  amount  being  unchanged  from  the  previous  year. 
The  equities  of  the  company  in  these  holdings  were  small. 

Peoria  and  Eastern. 

For  1906,  the  Peoria  and  Eastern,  owned  by  the  Big  Four, 
showed  gross  earnings  of  $2,165,771,  a  slight  increase  from  the 
year  before.  The  net  earnings  were  $859,885,  a  slight  increase, 
and  the  nominal  surplus  was  $172,800,  of  which  $150,000  was 
set  aside  for  a  special  improvement  fund.  The  road  therefore 
returned  to  the  Big  Four  nothing  on  the  latter's  stock  owner- 
ship in  the  road.  The  Peoria  and  Eastern  operated  for  the  year 
1906,  352  miles  of  main  road. 

Cincinnati  and  Northern. 

This  subsidiary  road  operated  247  miles  of  road  in  1906, 
showed  gross  earnings  of  $1,027,728,  net  of  $228,124,  and  a 
surplus  over  first  charges  of  $132,696,  as  against  $4,673  in  1905. 
The  surplus  for  1906  equalled  4.4%  on  its  $3,000,000  of  capital 
stock,  but  no  dividends  were  paid. 

Increase  of  Capitalization. 

In  1905  there  was  an  authorized  increase  in  the  common 
stock  from  $28,700,000  to  $40,000,000  and  during  1905  and  1906 


CLEVELAND,  CINCINNATI,  CHICAGO  &  ST.  LOUIS  245 

this  stock  was  sold,  the  larger  part  being  taken  by  the  Lake 
Shore.  The  increase  in  the  company's  nominal  capitalization 
over  a  period  of  6  years  was  as  follows : 


Year 

Common 
Stock 

Preferred 

Stock 

(5  per  cent.) 

Funded 
Debt 

Total 

$95,588,037 
113,612,727 

Gross 
Earnings 

1899-00 
1906 

$27,989,310 
40,000,000 

$10,428,997 
10,000,000 

$57,169,730 
63,612,727 

$16,806,850 
24,594,916 

Net  increase  over  six  years :  Nominal  Capital,  18%  ;  Gross 
Earnings,  44%. 

In  Oct.,  1906,  it  was  voted  to  increase  the  amount  of  common 
stock  to  $50,000,000,  and  the  new  $10,000,000  of  stock  was  offered 
to  stockholders  at  $90  per  share. 

Character  of  Traffic. 

Passenger  earnings  were  high,  amounting  in  1906  to  about 
28%  of  the  gross  earnings.  Bituminous  coal  represented  more 
than  a  quarter  of  the  freight  tonnage,  the  balance  of  the  com- 
pany's traffic  being  very  evenly  distributed  between  farm  pro- 
ducts, products  of  mines  and  manufactures. 

Stability  of  Earnings. 

In  ten  years  the  company  has  shown  a  handsome  increase 
in  earnings  from  $7,455  per  mile  in  1895-6  to  $12,402  in  1906. 
This  increase  was  very  even  and  showed  no  setback  from  year 
to  year  within  the  period  named.    The  details  are  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1895-6 

1,838 

$13,702,535 

$7,455 

1896-7 

1,838 

13,117,111 

7,136 

1897-8 

1,838 

14,320,094 

7,796 

1898-9 

1,838 

14,719,363 

8,008 

1899-00 

1,891 

16,806,851 

8,887 

1900-1 

1,891 

17,877,489 

9,454 

1901-2 

1,891 

18,717,071 

9,898 

1902-3 

1,891 

20,390,701 

10,783 

1903-4 

1,891 

21,069,954 

11,142 

1905* 

1,893 

22,517,763 

11,355 

1906 

1,893 

24,594,916 

12,402 

*Fiscal  year  changed. 


246  CLEVELAND,  CINCINNATI,  CHICAGO  &  ST.  LOUIS 

Maintenance. 

In  the  six  and  one-half  years  embraced  in  the  following 
table  it  will  be  seen  that  the  traffic  density  did  not  increase 
rapidly, — about  25%.  while  the  total  maintenance  charges  rose 
from  $2,566  per  mile  to  $3,459,  or  about  36%. 


Maintenance  Der  Mile 

Year 

Traffic  Densifv 

Total 

Way 

Equipment 

1900-1 

1,009,564 

$1,197 

$1,369 

$2,566 

1901-2 

1,064,192 

1,329 

1,496 

2,825 

1902-3 

1,086,783 

1,525 

1,681 

3,206 

1903-4 

1,029,851 

1,440 

1,628 

3,068 

1905 

1,156,591 

1,512 

1,709 

3,221 

1906 

1,284,311 
1,105,215 

1,657 
$1,443 

1,802 

3,459 

Average 

$1,614 

$3,057 

Additional  main  track,  252  miles. 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way            Equipment 

Wabash 

T.  St.  L.  &  W. . 

Alton 

880,032 
1,046,149 

959,668 
1,099,515 

$1,332 

996 

1,254 

1,371 

$1,370 

959 

1,630 

1,273 

$2,702 
1,955 
2,884 
2,644 

Comparing  the  expenditures  of  the  Big  Four  over  a  series  of 
years  with  other  roads  in  the  same  section,  of  about  the  same 
traffic  density,  it  will  be  seen  that  they  were  higher  than  any — 
considerably  higher  even  than  the  Alton  or  the  Vandalia,  both  of 
which  have  been  very  heavily  maintained.  It  may  be  taken, 
therefore,  that  considerable  earnings  have  been  set  aside  for  im- 
provements and  charged  to  operating  expenses.  This  conclusion 
is  borne  out  by  the  fact  that  the  surplus  shown  in  1906  and  the 
two  years  preceding  was  less  than  in  any  of  the  three  years  back 
of  that.  It  is  evident  that  these  improvements  have  been  adjusted 
to  income. 

The  operating  ratio  for  1906  was  75%,  the  same  as  the  pre- 
ceding year.  There  seems  no  good  reason  why  the  Big  Four 
should  not  be  operated  for  around  70%  and  if  the  surcharge  of 
maintenance  be  reckoned  at  no  more  than  4%  of  gross  income, 
this  would  add  around  $1,000,000  to  the  nominal  surplus  shown. 

Aside  from  these  heavy  maintenance  charges,  the  following 
sums  were  deducted  from  surplus  for  improvements  in  the  years 
named : 


CLEVELAND,  CINCINNATI,  CHICAGO  &  ST.  LOUIS  247 

1900-1 $567,852 

1901-2 600,371 

1902-3 311,263 

1903-4 1,000,000 

No  similar  appropriations  were  made  from  surplus  in  either 
1905  or  1906. 

Surplus. 

Under  the  conditions  indicated  above  the  nominal  surplus 
shown  over  a  series  of  years  has  been  as  follows : 


Dividends 

Per  cent. 

Dividends 

Year 

Surplus 

on  Preferred 

Earned  on 

Paid  on 

Average 

Stock 

Common 

Common 

Price 

1899-00 

$2,273,982 

5 

6.3 

3 

53 

1900-1 

2,332,542 

5 

6.5 

3 

72 

1901-2 

2,250,860 

5 

6.3 

3i 

99 

1902-3 

2,029,979 

5 

5.5 

4 

79 

1903-4 

1,639,457 

5 

4 

4 

79 

1905* 

1,870,424 

5 

3.8 

4 

99 

1906* 

2,064,731 

5 

3.8 

4 

99 

*Calendar  year. 

.It  will  be  noted  that  in  neither  1905  or  1906  did  the  per- 
centage of  surplus  remaining  for  the  common,  equal  the  full  4% 
dividend  paid,  when  reckoned  on  the  full  amount  of  stock  out- 
standing at  the  close  of  the  year.  On  account  of  the  increase  of 
$7,000,000  in  1905  and  about  $4,500,000  in  1906  the  surplus  was 
actually  sufficient  to  pay  the  4%  dividend  and  leave  a  small  re- 
mainder. 

Dividend  Record. 


lows 


Over  a  series  of  years  the  dividends  paid  have  been  as  fol- 

Year.  Dividends. 

1891-07:  Preferred 5%    Yearly 

Common. 

1883 2 

1890 3  and  1  extra. 

1891-3 3 

1894-9 — 

1900 3 

1901 zy2 

1902-7, 4 


248  CLEVELAND,  CINCINNATI,  CHICAGO  &  ST.  LOUIS 

The  Balance  Sheet. 

As  of  December  31st,  1906,  the  balance  sheet  showed: 

Current    Assets $6,031,366 

Current   Liabilities 14,153,434 

Leaving  a  debit  balance  of $8,122,068 

The  item  of  loans  and  bills  payable  at  the  close  of  the  year 
was  $5,615,925,  almost  the  whole  of  which  was  created  during 
the  year.  It  is  evident  from  the  above  showing  that  the  com- 
pany was  in  need  of  working  capital.  The  various  items  of  cash 
totaled  $2,712,759,  while  the  credit  to  profit  and  loss  was  $1,- 
673,234. 

Investment  Value. 

The  Big  Four  has  profited  in  no  very  material  way  by  the 
Community  of  Interest  plan.  Its  average  freight  rates  in  1899 — 
the  bed-rock  year — were  .54c  per  ton  mile  and  .59c  in  1906.  This 
was  an  increase  of  less  than  six-tenths  of  a  mill  per  ton  mile  and 
this  on  the  company's  traffic  for  1906  would  have  represented  a 
difference  in  the  gross  earnings  of  only  about  $1,000,000.  The 
earnings  of  the  road  may  therefore  be  regarded  as  solid  and  it 
has  already  been  noted  that  its  maintenance  charges  were  heavy 
and  especially  so  in  1906. 

The  preferred  stock  has  paid  its  full  5%  dividend,  with  the 
exception  of  two  years,  since  1891.  It  sold  as  high  as  $124  per 
share  in  1902,  declining  to  $100  in  1903  and  rising  to  $118  in 
1906.  The  amount  of  stock  outstanding  is  not  large  and  the 
dividend  requirement  of  $500,000  should  easily  be  met  even  in 
times  of  severe  stress. 

Four  per  cent,  has  been  paid  upon  the  common  since  1902. 
In  the  latter  year  it  sold  as  high  as  $108  per  share,  declining  to 
$66  in  the  year  following,  rising  to  $111  in  1905,  falling  again  to 
$63  per  share  in  March  of  1907. 

If  it  be  reckoned  that  around  $1,000,000  of  earnings  were 
concealed  in  maintenance  charges  in  1906,  the  surplus  for  that 
year  equalled  about  7%  for  the  common  stock,  so  that  in  reality 
there  was  a  fairly  safe  margin  for  the  4%  dividend.  But  the 
balance  sheet  showed  that  the  company  was  in  need  of  working 
funds  and  that  its  current  liabilities  had  shown  a  heavy  increase 
through  1906.     By  reference  to  the  capitalization  account,  it  will 


CLEVELAND,  CINCINNATI,  CHICAGO  &  ST.  LOUIS  249 

be  seen  that  the  fixed  charges  are  already  very  high,  nearly 
70°/o,  so  that  the  road  was  in  no  position  for  further  bond  issues 
and  in  1905-6  it  could  only  sell  its  common  stock  at  a  discount 
of  10%. 

In  October,  1906,  it  was  voted  to  increase  the  common  stock 
from  $40,000,000  to  $50,000,000,  the  new  stock  being  offered  to 
stockholders  at  $90  per  share.  But  this  proposed  issue  was  not 
well  received. 

When  new  stock  must  be  sold  at  a  discount,  it  is  fairly  evi- 
dent that  there  is  no  immediate  prospect  for  an  increase  in  divi- 
dends. It  is  not  very  clear,  therefore,  that  this  4%  common 
stock  should  sell  on  a  much  higher  basis  than  some  of  the  4% 
preferred  stocks  like  the  M.  K.  &  T.,  etc.  But  purchased  at  some- 
thing like  the  low  price  of  1907,  it  should  in  time  show  an  at- 
tractive profit  to  the  holder. 


CLEVELAND,  LORAIN  AND  WHEELING 

RAILWAY. 

The  Cleveland,  Lorain  &  Wheeling  Railway  is  a  small  coal 
road  operating  194  miles  of  track  between  a  point  opposite 
Wheeling,  W.  Va.,  to  Lorain  on  Lake  Erie,  with  a  branch  to 
Cleveland.  It  is  a  part  of  the  Baltimore  &  Ohio  system  and 
largely  owned  by  that  road,  but  separately  operated.  In  1904 
the  Baltimore  &  Ohio  owned  $3,012,700  out  of  the  $5,000,000  of 
preferred  stock  outstanding  and  $6,760,600  out  of  the  $8,000,000 
common  stock.  The  directorate  of  the  road  is  made  up  in  the 
B.  &  O.  interest. 

As  of  June  30th,  1906,  the  capital  account  stood  as  follows : 

Common    stock $8,000,000 

Preferred    stock 5,000,000 

Funded   Debt 6,843,000 

B.  &  O.  loan 3,486,833 

Total  Capital $23,329,833 

Total  Capital  per  mile $120,254 

On  a  traffic  density  of  3,350,053  ton  miles  the  company  spent 
an  average  of  $3,311  per  mile  for  maintenance  of  way  in  1906  and 
$3,108  for  maintenance  of  equipment.  It  is  to  be  remembered 
that  the  larger  part  of  the  traffic  of  the  road  is  the  haulage  of 
soft  coal  and  ores  and  the  passenger  business  of  the  road  is  very 
slight,  amounting  to  only  about  6%  of  the  gross  earnings,  so  that 
the  total  expenditure  of  $6,419  undoubtedly  represented  very 
ample  maintenance,  if  not  more. 

On  this  basis  of  maintenance  the  road  showed  in  1906: 

Gross   Earnings $3,480,256 

Net  Earnings 935,660 

Fixed   Charges 559,505 

Surplus  379.090 

(250) 


CLEVELAND,  LORAIN  &  WHEELING  251 

The  net  earnings  of  1906  were  equivalent  to  about  4°/o  on 
the  capitalization  of  the  road.  In  other  words  the  capitalization 
is  high.  Fixed  charges  consumed  60%  of  the  total  net  income. 
There  remained  a  surplus  sufficient  to  pay  the  full  5%  on  the 
$5,000,000  of  preferred  stock  and  show  a  balance  of  2%  on  the 
common  stock. 

The  full  5%  was  paid  on  the  preferred  in  1906  and  likewise 
in  1905.     In  1904,  2l/2cfo  was  paid.     None  previously  since  1896. 

The  indebtedness  to  the  Baltimore  &  Ohio  Railroad  for  ad- 
vances during  the  year  increased  by  only  $28,816.  In  other 
words,  the  road  in  1906  had  practically  ceased  to  borrow. 

Although  there  was  a  considerable  increase  during  1906  of 
tonnage,  the  cost  of  conducting  transportation  for  the  year  de- 
creased by  $55,034,  showing  that  the  considerable  improvements 
made  in  the  property  and  the  liberal  sums  devoted  from  earnings 
to  improvements  were  bearing  their  fruit. 

In  view  of  payment  of  dividends  on  the  preferred  stock,  it 
is  obvious  that  the  indebtedness  to  the  Baltimore  &  Ohio  will  not 
be  directly  repaid,  but  funded,  and  should  no  serious  depression 
come  to  the  coal  industry,  the  company  should  be  able  to  con- 
tinue payment  of  the  full  5%  on  the  preferred  stock.  This  stock 
sold  during  1906  at  from  $105  to  $112  per  share.  It  is  non- 
cumulative. 

The  prospect  for  dividends  on  the  common  seem  rather  re- 
mote, for  while  maintenance  charges  in  the  years  previous  to 
1906  undoubtedly  carried  considerable  earnings  devoted  to  im- 
provements, the  rise  in  the  cost  of  labor  and  supplies  have  been 
such  that  probably  the  charges  of  1906  were  not  greatly  above 
the  normal  demands  of  the  property.  If,  however,  the  road 
should  continue  to  increase  its  earnings  (it  has  more  than  doubled 
its  gross  income  since  1899),  it  is  obvious  that  the  surplus  would 
soon  be  sufficient  to  permit  of  dividends  on  the  common. 

Evidently  in  anticipation  of  such  an  event  the  common  sold 
at  from  $85  to  $100  per  share  in  1906.  It  did  not  appreciably 
decline  in  March  of  1907.  Such  prices,  with  interest  rates  at  the 
1906  level,  could  hardly  have  been  justified  on  the  expectation  of 
less  than  a  6%  dividend.  Even  supposing  that  25%  of  the  main- 
tenance charges  for  1906  represented  surcharge,  this  would  have 
increased  the  surplus  by  only  about  $300,000,  which,  added  to  the 
$379,000  surplus  shown,  would  have  given  a  surplus  of  $679,000. 
Dividing  this  equally  between  dividends  and  improvements,  the 


252  CLEVELAND,  LORAIN  &  WHEELING 

amount  remaining  over  the  payment  of  the  5%  on  the  preferred 
would  have  been  less  than  2%. 

With  its  earnings  pivoted  upon  the  prosperity  of  a  single 
industry,  and  that  industry  extremely  sensitive  to  general  con- 
ditions, it  is  evident  that  there  were  many  other  stocks  on  the  list 
which  represented  a  far  more  attractive  purchase  at  the  price. 


COLORADO  AND  SOUTHERN  RAILWAY. 

The  Colorado  and  Southern,  through  its  extensions  to  Gal- 
veston, will  take  on  an  importance  that  it  has  hitherto  lacked. 
It  belongs  to  the  Hawley  group  of  roads,  and  operates  a  line  ex- 
tending from  Denver,  southeasterly  to  Fort  Worth,  with  several 
branch  lines  westward  from  Denver  through  central  and  south- 
ern Colorado.  It  also  owns  a  line  from  Cheyenne  to  Orin  Junc- 
tion on  the  North  Western  line  in  Wyoming,  and  operates  from 
Denver  to  Cheyenne  under  trackage  rights  over  the  Union 
Pacific. 

The  road  represents  a  reorganization  in  1899  of  the  Union 
Pacific,  Denver  and  Gulf,  which  was  in  turn  a  consolidation  in 
1890  of  the  Colorado  Central,  the  Denver,  Texas  and  Fort  Worth, 
and  several  Union  Pacific  lines.  Up  to  the  time  of  the  Pinion 
Pacific's  bankruptcy,  the  Denver  and  Gulf  was  controlled  and 
operated  by  that  road,  and  the  subsidiary  line  followed  its  pa- 
rent into  bankruptcy  in  1893. 

The  Colorado  and  Southern  took  over  as  an  asset  from  the 
bankrupt  company  practically  all  the  stock  of  the  Fort  Worth 
and  Denver  City,  owning  a  line  from  Texline  to  Fort  Worth, 
Texas.  It  sold  off  its  Julesburg  branch  to  Lacelle,  Colorado,  to 
the  reorganized  Union  Pacific,  and  secured  its  traffic  rights  from 
Denver  to  Cheyenne  in  exchange.  During  the  year  of  1906,  the 
Colorado  Springs  and  Cripple  Creek  District  railway,  75  miles 
long,  was  added,  together  with  another  short  piece  of  rail,  and 
beginning  with  this  year  the  accounts  of  the  Colorado  and  South- 
ern, the  Fort  Worth  and  Denver  City,  and  the  subsidiary  roads 
were  consolidated  into  the  Colorado  and  Southern  system,  in- 
stead of  presenting  separate  reports  as  hitherto. 

In  1905  the  road  sold  a  half  interest  in  its  Trinity  and 
Brazos  Valley  railway  to  the  Rock  Island  Company,  the  latter 
assuming  one-half  of  the  guarantees  as  to  interest,  etc.  The 
Brazos  Valley  extends  to  Houston,  Texas,  and  has  trackage 
rights  from  there  to  Galveston  over  the  Gulf,  Colorado  and  Santa 

(253) 


254  CO  I A  )  In  A 1 )( )  &  SO  UTHERN 

Fe.  The  report  states  that  this  will  provide  the  shortest  through 
line  between  the  Colorado  section  and  tidewater.  It  notes  fur- 
ther that  Galveston  is  almost  exactly  on  the  same  meridian  as 
Kansas  City  and  that  exports  through  Galveston  already  rank 
next  in  value  to  those  through  New  York. 

By  the  completion  of  another  short  line  and  trackage  rights, 
the  Colorado  and  Southern  will  also  have  the  shortest  line  be- 
tween Dallas  and  Galveston,  and  likewise  between  Fort  Worth, 
and  Galveston.  With  the  extensions  which  are  planned  from 
Wichita  Falls  south  to  Abilene,  Texas,  the  Colorado  and  South- 
ern will  operate  approximately  2,250  miles  of  railroad. 

The  main  interest  of  all  this  lies  in  the  fact  that  the  road 
is  popularly  supposed  to  be  held  for  sale  at  some  future  time  to 
one  of  the  larger  railway  systems,  among  which  the  Rock  Island 
and  the  Union  Pacific  have  been  mentioned.  Indeed  it  was  sup- 
posed, when  in  1905  B.  F.  Yoakum  entered  the  directorate  and 
became  a  member  of  the  executive  committee  of  the  Colorado1 
Southern,  that  this  indicated  a  close  working  alliance  with  the 
Rock  Island,  this  idea  being  further  confirmed  by  the  construc- 
tion of  the  Brazos  Valley  line  to  Galveston.  In  addition  to  this 
joint  line  to  the  south,  the  Colorado  and  Southern  also  owns  one 
half  of  the  Colorado  Midland  Railway,  jointly  with  the  Rio  Grande 
Western — i.e.,  the  Denver  and  Rio  Grande.  The  Colorado  Midland 
extends  from  Denver  and  Colorado  Springs  to  Grand  Junction, 
and  operates  334  miles.  With  the  completion  of  the  Western 
Pacific,  the  Colorado  and  Southern  will  form  with  the  Gould  lines 
another  through  line  from  San  Francisco  to  the  Gulf,  thus  in- 
jecting a  new  element  of  competition  with  the  Harriman  lines. 

Again,  the  Colorado  Southern  joins  the  Burlington  lines  at 
Denver,  and  likewise  in  Wyoming,  and  it  would  require  but  a 
small  piece  of  track  to  reach  from  Orin  Junction,  the  northern 
terminal  of  the  Colorado  and  Southern  lines,  to  the  Burlington's 
main  line  through  to  Billings,  Montana,  thus  joining  up  a  route 
from  the  Mill  lines  to  the  Gulf.  This  latter  route  would  be  very 
considerably  shorter  for  the  cotton  traffic  which  the  Hill  lines 
now  draw  from  Texas  via  Kansas  City. 

Still  again,  this  same  short  extension  would  join  the  Colorado 
and  Southern  with  the  St.  Paul's  Pacific  extension,  so  that  by 
reason  of  its  peculiar  lie,  the  road  offers  an  interesting  number 
of  possibilities  of  combination. 


COLORADO  &  SOUTHERN  255 

The  Hawley  interests  acquired  control  of  the  property  in 
1902.  The  executive  committee  includes  Grenville  M.  Dodge,  the 
veteran  builder  of  the  Union  Pacific  Railway,  and  former  presi- 
dent of  the  Union  Pacific,  Denver  and  Gulf;  Edwin  Hawley, 
president  of  the  Minneapolis  &  St.  Louis,  etc. ;  John  J.  Emery,  also 
a  director  in  the  Toledo,  St.  Louis  and  Western,  vice-president  of 
the  Dayton  and  Michigan,  etc.;  Benjamin  F.  Yoakum,  chairman 
of  the  board  of  the  Rock  Island  Company,  and  the  operating  head 
of  that  system ;  and  Hans  Winterfeldt,  of  Hallgarten  and  Com- 
pany, bankers,  New  York.  The  other  directors  were:  Henry  E. 
Huntington,  associated  with  Mr.  Hawley  in  other  enterprises, 
heavily  interested  in  traction  companies  in  Los  Angeles,  etc. ; 
James  N.  Wallace,  president  of  the  Central  Trust  Company, 
New  York,  also  a  director  in  the  National  Railroad  of  Mexico  ; 
Henry  Walters,  chairman  of  the  boards  of  both  the  Atlantic  Coast 
Line  and  of  the  Louisville  and  Nashville;  Norman  B.  Ream, 
prominent  in  the  affairs  of  the  Erie,  also  a  director  in  the  Balti- 
more and  Ohio,  the  Seaboard  Air  Line,  etc. ;  Harry  Bronner, 
secretary  of  the  Colorado  Midland ;  Henry  Budge,  formerly  vice- 
president  of  the  Clover  Leaf;  W.  S.  Crandall,  New  York;  and 
Frank  Trumbull,  president,  Denver,  Colo. 

Capitalization. 

Including  the  small  amount  of  Fort  Worth  and  Denver  City 
stock  outstanding,  the  capitalization  of  the  road  on  June  30th, 
1906,  stood  as  follows: 

Common  stock $31,000,000 

1st    Preferred 8,500,000 

2nd  Preferred 8,500,000 

Total  stock $48,000,000 

Funded    debt 41,233,637 

Equipment   lease 624,000 

F.  W.  &  D.  C.  Stock 625,965 

Total  capital $90,483,602 

Securities  held 4,592,316 

Approx.   net  capitalization $85,890,286 


256  COLORADO  &  SOUTHERN 

Approx.  net  capital  per  mile $51,647 

Average  miles  operated 1,663 

Net  earnings  on  net  capital 4.3% 

Stock  on  net  capitalization 56% 

Fixed  Charges  on  Total  Net  Income  55% 

Factor  of  Safety 45% 

On  the  four  and  a  half  millions  of  securities  held,  the  road 
derived  in  1906,  only  $83,913  of  income,  or  less  than  2%  on  the 
book  valuation  of  these  holdings.  The  total  amount,  however, 
is  small,  and  does  not  greatly  affect  the  calculations. 

It  will  be  seen  that  the  approximate  net  capitalization  is  high. 
The  average  of  $51,647  per  mile  compares  with  an  average  of 
about  $30,000  per  mile  for  such  standard  roads  as  the  Burlington, 
the  North  Western  and  the  St.  Paul. 

This  fact  of  over-capitalization  is  further  reflected  in  the 
showing  of  net  earnings  on  net  capital,  the  net  earnings  showing 
only  4.3%  in  the  very  exceptional  year  of  1906,  when  the  net 
earnings  made  a  jump  of  nearly  50%  over  the  year  preceding. 
The  showing  of  net  earnings  on  net  capitalization  in  1905  was 
rather  less  than  3%.  This  was  against  an  average  of  from  nine 
to  ten  per  cent,  for  the  three  western  roads  named  above.  The 
larger  part  of  this  very  liberal  capitalization  is,  however,  repre- 
sented by  stock,  on  five-sixths  of  which  no  dividends,  up  to  1906, 
had  ever  been  paid. 

On  the  very  favorable  showing  of  1906,  the  Fixed  Charges 
consumed  55%  of  the  total  net  income,  leaving  a  nominal  Factor 
of  Safety  of  45%.  It  will  be  noted,  however,  that  this  was  quite 
abnormal.  In  the  preceding  year,  before  the  accounts  of  the  two 
subsidiary  lines  were  consolidated,  the  Fixed  Charges  on  the 
Colorado  and  Southern  proper  (about  two-thirds  of  the  system), 
consumed  65%  of  the  total  net  income,  leaving  a  margin  of 
safety  of  only  35%. 

Of  the  securities  held  in  1906  the  principal  items  were  $2,- 
922,000  Trinity  and  Brazos  Valley  first  mortgage  bonds,  and  a 
half  interest  in  the  Colorado  Midland  stock,  amounting  to  $1,- 
710,100  par  value  of  the  common,  and  $2,477,400  of  the  preferred. 
In  recent  years  that  road  has  chiefly  earned  a  deficit. 

The  capital  stock  of  the  Colorado  and  Southern  has  not  been 
increased  since  the  organization  of  the  company  in  1899,  but  the 
funded  debt  has  risen  rather  rapidly.     That  of  the  Colorado  and 


COLORADO  &  SOUTHERN 


257 


Southern  proper  amounted  in  1900  to  $17,603,000,  with  a  small 
amount  of  car  trust  notes,  and  for  the  Fort  Worth  and  Denver 
City,  to  $2,036,500,  or  a  total  of  $19,639,500.  On  June  30th,  1906, 
the  funded  debt  of  the  system  was  $41,233,639,  an  increase  of 
$21,604,139. 

Of  this  increase,  $3,439,000  was  added  by  the  inclusion  of 
the  Colorado  Springs  and  Cripple  Creek  District  Railway  in 
1906,  leaving  a  net  increase  for  the  bonded  debt  of  the  system  in 
six  years,  of  $18,165,139,  an  increase  of  nearly  100%.  In  the  same 
period  the  gross  earnings  of  the  Colorado  and  Southern-Fort 
Worth  lines  rose  from  about  $6,200,000  (the  fiscal  years  of  the 
two  roads  did  not  coincide,  so  that  the  sum  has  to  be  estimated) 
to  $11,653,445  in  1906.  In  other  words,  roughly  speaking,  the 
increase  of  funded  debt  and  gross  earnings  have  about  kept  even 
pace,  the  difference  of  debt  rather  exceeding  the  increase  of  earn- 
ings. 

Stability  of  Earnings. 

Of  the  tonnage  of  the  road  in  1906,  farm  products  formed 
16%  of  the  total,  with  coal  30%,  lignite  coal  11%,  precious  ores 
10%,  the  balance  being  distributed  over  the  usual  variety  of 
traffic.  All  told,  products  of  mines  made  up  two-thirds  of  the 
tonnage  of  the  road,  but  contributed  less  than  half  of  its  gross 
freight  earnings. 

Up  to  1903,  the  Fort  Worth  and  Denver  City  reported  for 
the  calendar  year  and  the  Colorado  and  Southern  for  a  fiscal  year 
ending  June  30th.  The  following  table  shows  the  mileage 
and  earnings  of  the  Colorado  and  Southern  proper  from  the  first 
year  of  its  reorganization  to  the  close  of  1902,  the  total  earnings 
of  the  Colorado  and  Southern-Fort  Worth  line  in  1903  and  1904, 
and  the  years  of  1905  and  1906  include  also  the  operations  of  the 
Colorado  Springs,  and  Cripple  Creek  District  road. 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1899-0 

1,142 

$4,237,743 

$3,710 

1900-1 

1.142 

4,794,649 

4,200 

1901-2 

1  ,133 

5,580,327 

4,925 

1902-3 

1 ,575 

8,637,676 

5,487 

1903-4 

1,574 

8,199,305 

5.205 

1904-5 

1,646 

9,443,426 

5,733 

1905-6 

1,663 

11,653,445 

7.006 

17 


258 


COLORADO  &  SOUTHERN 


Under  the  conditions  noted  above,  the  comparisons  are  of, 
value  only  since  1903.  The  earnings  for  that  year  showed  a  very 
considerable  increase  over  the  earnings  for  the  year  before,  and 
over  any  preceding  year  of  the  company's  history,  the  mileage 
earnings  amounting  to  very  nearly  $5,500  per  mile.  These  earn- 
ings slumped  somewhat  in  the  year  succeeding,  but  rose  rapidly 
in  1905,  and  still  more  so  in  1906.  In  the  latter  year  gross  earn- 
ings of  the  system  increased  23%,  and  net  earnings  48%,  and 
taxes  remaining  about  the  same,  the  Total  Net  Income  available 
for  charges  and  dividends  rose  from  $2,212,000  to  $3,439,000,  an 
increase  of  60%. 

This  was  a  quite  astonishing  jump,  and  unfortunately  the 
change  in  the  methods  of  reporting  the  earnings  of  the  system 
makes  it  impossible  to  find  out  whence  this  heavy  increase  of 
business  was  derived.  There  was  a  slight  reduction  in  the  aver- 
age rate  per  ton  mile,  of  from  1.07c  to  1.02c,  this  being  com- 
pensated by  a  considerable  rise  in  the  trainload  from  247  to  271 
tons,  so  that  the  freight  earnings  per  freight  train  mile,  rose 
from  $2.66  to  $2.79. 

Maintenance. 

Since  the  average  freight  earnings  per  mile  remained  about 
the  same,  it  follows  that  the  increase  of  traffic  density  was  about 
the  same  as  the  increase  of  gross  earnings  per  mile ;  it  was,  in 
other  words,  about  23%  ;  by  comparison  with  the  previous  year  it 
will  be  seen  that  this  considerable  increase  of  traffic  was  carried 
with  about  the  same  charges  for  maintenance  of  way  as  for  the 
preceding  year.  There  was,  however,  very  considerable  increase 
in  the  charges  for  maintenance  of  equipment.  The  charges  for 
several  years  compare  as  follows : 


Year 


1900-1 
1901-2 
1902-4 
1903-3 
1904-5 
1905-6 

Average 


Traffic  Density 


269  ,859 
318,278 

400,991 
299  ,484 
394,749 

503  ,778 

364,523 


Maintenance  per  Mile 


Way 


$611 
840 

s,s7 

865 
1  ,148 
1,178 

8921 


Equipment 

8557 
650 
815 
826 
788 
913 


8758 


Total 


$1,168 
1,490 
1  ,702 
1  ,691 
1,936 
2,091 

$1  ,679 


Atchison    

577  ,005 

$1  ,123 

SI  ,113 

$2  ,236 

Burlington 

580  ,024 

1  ,104 

1  ,032 

2,136 

Missouri     Pacific 

(Aver.  2  years) 

623  ,807 

819 

821 

1  ,640 

COLORADO  &  SOUTHERN  259 

The  equipment  charges  for  the  two  years  were : 

1905.  1906. 

Locomotives   $2,503  $2,509 

Freight  cars 61  66 

Passenger    cars 632  831 

It  is  to  be  further  remembered  that  387  out  of  1,663  miles 
of  the  system  was  narrow  gauge  track,  with  a  correspondingly 
lighter  equipment  and  lessened  wear  and  tear,  so  that  an  aggregate 
maintenance  charge  of  $2,091  per  mile  in  1906  was  probably 
adequate,  although  it  was  not  up  to  the  same  standard  as  the 
preceding  year,  but  it  compares  very  favorably  with  that  of  the 
Burlington  and  the  Atchison,  which  in  1906  were  both  very 
heavily  charged. 

On  the  other  hand,  the  Atchison,  for  example,  has  set  aside 
heavy  sums  for  improvements  annually  from  earnings  in  ad- 
dition ;  but  on  the  Colorado  and  Southern  such  charges  have 
been  made  to  operating  expenses  directly  and  there  have  been 
no  additional  appropriations. 

Surplus  Earnings. 

In  the  following  table  is  shown  the  amount  of  surplus  avail- 
able for  dividends  and  improvements  for  the  Colorado  and  South- 
ern proper  up  to  1906,  and  for  the  entire  system  for  the  latter 
year.  The  actual  difference  in  the  preceding  years  was  not  large, 
the  surplus  on  the  Fort  Worth  and  Denver  City  line  in  1905 
amounting  to  only  $6,354. 


Dividends 

Per  cent. 

Per  cent. 

Average 

Year 

Surplus 

Paid  on  1st 

Earned  on 

Earned  on 

Price  1st 

Preferred 

1st  Prefer'd 

2nd  Prefer'd 

Prefer'd 

1900-1 

$405,648 

3* 

4.7 

.77 

50 

1901-2 

626,759 

34 

7.3 

3.37 

69 

1902-3 

496  ,953 

4 

5.8 

1.84 

58 

1903-4 

437,841 

2 

5.1 

1.15 

55 

1904-5 

610,315 

— 

7.1 

3.18 

61 

1905-6 

1  ,766,212 

4 

20.7 

10.7 

70 

With  the  very  heavy  increase  of  earnings  in  1906,  and  with 
no  corresponding  increase  in  the  operating  charges,  the  surplus 
for  the  year  was  very  nearly  200%  higher  than  in  the  year  pre- 
ceding, so  while  in  1905  the  road  paid  no  dividends  on  any  of  its 


260  COLORADO  &  SOUTHERN 

stock,  and  earned  only  7%  on  its  first  preferred,  its  showing  in 
1906  was  equivalent  to  the  full  Ac/o  on  both  classes  of  preferred 
stock,  and  3%  additional  on  the  common. 

The  only  class  of  stock  on  which  any  dividend  had  been  de- 
clared up  to  1906  was  the  first  preferred,  which  has  paid  as  fol- 
lows: 

% 
1900 2 

1901 sy2 

1902 3y2 

1903 4 

1904 2 

1905 

1906 4 

In  1907  an  initial  dividend  of  2%  was  declared  on  the  2nd  Pref. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  June  30th,  1906,  the  balance 
sheet  showed: 

Current   assets $1,997,487 

Current   liabilities 1,254,322 

leaving  a  working  balance  of $743,165 

There  was  in  addition  to  the  current  liabilities,  $725,310  of 
deferred  liabilities,  accrued  taxes,  interest  etc.,  bringing  the  total 
liabilities  up  to  $1,979,632. 

The  item  of  cash  amounted  to  $1,146,568,  and  the  balance  to 
the  credit  of  Profit  and  Loss  was  $3,246,291. 

The  road  also  had  assets  in  special  funds  to  the  amount  of 
$244,275,  and  had  advanced  to  subsidiary  companies,  $1,048,639. 

Investment  Value. 

Both  the  first  and  second  preferred  are  entitled  to  4%  divi- 
dends, non-cumulative.  It  will  be  seen  from  the  table  of  surplus 
earnings  that  the  full  5%  has  been  earned  on  the  first  preferred 
since  1900,  and  that  in  the  exceptional  year  of  1906  there  was  a 
very  large  balance  remaining.  In  1906,  prices  on  this  stock 
ranged  between  $66  and  $73  per  share.  This  low  price  was  un- 
doubtedly occasioned  by  the  passing  of  the  dividend  in  1905. 
The    dividends    were    resumed    in    1906    on    this    stock,    and    there 


COLORADO  &  SOUTHERN  261 

seems  no  reason  why  this  stock  should  not  eventually  sell  at 
from  $80  to  $90  per  share,  or  possibly  even  higher,  should  there 
be  no  heavy  decline  in  railway  values  generally. 

The  full  dividend  on  the  second  preferred  had  never  been 
earned,  save  in  the  single  year  of  1906.  In  that  year  it  sold  be- 
tween $43  and  $58  per  share.  In  March  of  1907,  an  initial  dividend 
of  2°/o  was  declared.  Should  the  road  continue  to  show  anything 
like  the  earnings  of  1906,  this  stock  would  be  put  upon  its  full  divi- 
dend basis,  and  would  then  be  entitled  to  sell  around  $70  to  $80 
per  share. 

The  price  of  both  these  stocks  has  been  somewhat  depressed 
from  the  fact  that  in  1905  the  road  determined  upon  the  creation 
of  a  refunding  and  extension  mortgage  to  the  amount  of  $100,- 
000,000.  During  the  fiscal  year  of  1906  bonds  of  this  issue  were 
put  out  to  the  amount  of  $11,372,032,  of  which  $2,958,395  was 
applied  to  betterments,  improvements  and  to  reimbursing  the 
treasury  for  additions  to  equipment ;  while  the  balance,  $8,413,637, 
was  set  aside  for  the  payment  of  various  securities,  including 
$1,999,100  par  value  of  the  stock  of  the  Colorado  Springs  and 
Cripple  Creek  Railroad. 

This  was  a  heavy  issue  for  this  road,  and  indicates  the 
policy  of  expansion  upon  which  the  management  has  embarked. 
Owing  to  its  load  of  stock,  this  road  can  only  extend  through  the 
increase  of  its  fixed  debt,  and  this  fact  will  tend  to  make  its 
securities  sell  in  general  below  their  actual  worth  until  very 
definite  results  in  increased  business  have  been  shown. 

On  the  other  hand,  the  $17,000,000  of  preferred  stock  repre- 
sents more  than  one-third  of  the  outstanding  capital  stock  and 
would  share  to  some  extent  in  the  somewhat  artificial  value  given 
to  the  stock  by  the  fact  that  this  road  is  thought  to  be  coveted 
by  other  large  systems. 

The  amount  of  common  stock,  $31,000,000,  is,  compared  to 
the  earnings  and  the  capitalization,  enormous.  Nothing  was  ever 
earned  on  his  stock  until  1906,  when  the  surplus  showed  a 
nominal  3%  after  maintenance  charges  that  were  undoubtedly 
adequate,  if  not  much  more  than  that.  If  these  earnings  can  be 
maintained,  it  is  easy  to  see  that  the  stock  would  very  soon 
acquire  a  solid  value.  On  a  5%  basis  the  net  earnings  for  1906 
would  give  a  valuation  of  $75,000,000  to  the  road,  which,  after 
deducting  $60,000,000  of  stock  and  preferred  bonds,  would  leave 


262  COLORADO  &  SOUTHERN' 

$15,000,000  for  the  $31,000,000  of  common.  In  an  interview 
President  Hawley  stated  that  control  of  the  road  would  not  pass 
at  under  $40  a  share  for  the  common  stock. 

But  a  controlling  interest,  it  is  needless  to  say,  is  worth  very 
much  more  than  the  floating  supply  available  to  the  public  for 
investment  purposes.  In  1903  the  common  sold  as  low  as  $10  per 
share ;  but  its  earnings  have  increased  so  extensively  since  this 
time  that  this  affords  little  indication  as  to  what  the  stock  might 
sell  at  on  any  considerable  recession  of  prices.  In  the  general 
slump  of  1907  the  stock  did  not  sell  below  $22  per  share. 

This  stock,  it  goes  without  saying,  is  a  pure  speculation,  and 
it  is  to  be  noted  that  it  requires  less  than  half  of  the  common 
stock,  added  to  the  whole  amount  of  the  preferred  to  insure  con- 
trol. In  1906  Colorado  showed  an  amazing  prosperity,  in  which 
the  road  shared  in  the  fullest  degree.  The  greatest  development 
of  the  state  is  now  in  agriculture,  and  its  mining  has  now  fallen 
behind  the  value  of  its  agricultural  products.  Should  the  price 
of  silver  continue  to  advance,  this  would  mean  renewed  activity 
in  silver  mining,  and  there  is  no  state  in  the  Union  which  would 
benefit  more  from  this  than  Colorado. 

Again,  supposing  that  the  extension  to  the  Gulf,  with  pos- 
sible extensions  to  the  north  and  the  connection  which  will  be 
afforded  by  the  new  Western  Pacific,  should  reap  the  harvest 
which  the  management  hopes,  the  Colorado  and  Southern  would 
showr  a  large  increase  in  traffic. 

As  an  investment,  the  preferred  stock  offers  a  far  greater 
degree  of  solidity  than  the  common,  and  at  the  prices  of  1907  it 
would  seem  that  these  stocks  were  relatively  low.  The  investor 
in  common  would  obviously  be  speculating  upon  the  successful 
outcome  of  the  expansion  policy,  and  this  outcome  depends  more 
or  less  upon  the  continuance  of  the  amazing  prosperity,  not  to 
say  boom,  which  the  Southwest  has  enjoyed  within  recent  years. 
This  development,  alike  in  the  settlement  of  the  country  and  in 
the  rapid  construction  of  new  lines  of  railroad,  was  in  many  re- 
spects paralleled  by  the  expansion  of  the  Northwest  in  the 
eighties,  and  the  cautious  investor  will  not  fail  to  bear  in  mind 
the  possible  consequences  of  its  being  overdone. 


DELAWARE  AND  HUDSON  COMPANY. 

The  Delaware  &  Hudson  is  one  of  the  anthracite  coal  roads 
and  operates  a  line  from  Wilkesbarre,  Pa.,  to  Albany  and  Troy 
on  the  Hudson,  and  northward,  to  the  Canada  line  and  into  the 
Adirondack^,  with  a  total  of  843  miles. 

By  purchase  of  the  control  of  the  Quebec,  Montreal  &  South- 
ern and  the  proposed  extension  of  that  line  eastward  to  Quebec, 
the  company  will  add  280  miles  to  its  line  and  will  have  the 
shortest  road  between  Quebec,  Montreal  and  New  York  and  be- 
tween Quebec  and  Montreal.  This  will  give  the  lines  of  the 
company  direct  connection  with  all  the  important  railroads  in 
eastern  Canada  and  will  enable  it  to  serve  numerous  paper  mills 
located  along  its  lines  with  the  supply  of  wood  pulp  necessary 
for  their  operation. 

Like  the  New  Haven  road,  the  Delaware  &  Hudson  has 
also  made  extensive  purchases  in  traction  lines.  It  owns  the  en- 
tire capital  stock  of  the  United  Traction  Co.  which  operates  83 
miles  of  electrical  lines  in  Albany,  Troy  and  the  vicinity,  and  this 
company  in  turn  has  control  of  the  Hudson  Valley  Railway 
Company,  operating  129  miles  of  electric  road  extending  north- 
ward to  Warrensburg. 

The  Delaware  &  Hudson  Company  is  one  of  the  oldest  organi- 
zations of  the  country,  the  old  Delaware  &  Hudson  Canal  Com- 
pany having  been  chartered  by  the  New  York  State  legislature  in 
1823  for  the  purpose  of  constructing  a  canal  from  the  coal  fields 
of  Pennsylvania  to  the  Hudson  River  at  Rondout,  N.  Y.  The 
Gravity  Railroad  was  completed  in  1829.  The  present  name 
of  the  company  was  adopted  in  1900,  and  at  the  same  time  it  was 
authorized  to  sell  the  canal  and  purchase  its  own  securities  for 
sinking  fund  purposes.  The  Gravity  Railroad  was  brought  up  to 
standard  gauge  and  opened  for  regular  business  in  February, 
1900. 

The  company  owns  extensive  anthracite  coal  fields  with  un- 
mined  coal  estimated  by  the  government  at  260,000,000  tons,  and 

(263) 


264  DELAWARE  &  HUDSON 

by  the  company  itself  (January  1st,  1907)  at  207,801,964  tons. 
Up  to  1906  the  company  derived  a  larger  income  from  its  coal 
tonnage,  including  therein  the  amount  charged  its  Sales  Depart- 
ment, than  from  all  its  other  tonnage  combined;  but  the  mer- 
chandise tonnage  has  been  rising  steadily,  while  the  coal  ton- 
nage has  for  several  years  remained  about  stationary,  and  for 
1906  the  earnings  from  coal  were  slightly  less  than  from  general 
freight. 

Ownership. 

No  distinct  interest  is  recognized  in  control  of  the  road,  al- 
though the  Mutual  Life  and  Equitable  Life  interests  were  for- 
merly prominently  represented  on  its  directorate.  The  Mutual 
Life  was  in  1906  still  represented  by  Charles  A.  Peabody,  Presi- 
dent, and  Frederic  Cromwell,  Treasurer.  The  company  had 
3,819  shareholders  of  record  in  1905. 

In  1906  its  board  of  managers  consisted  of  Robert  M.  Oly- 
phant,  Chairman,  formerly  its  president ;  Alexander  E.  Orr  Presi- 
dent of  the  New  York  Life  Insurance  Company;  Chauncey  M. 
Depew,  of  the  New  York  Central  RR. ;  John  Jacob  Astor;  David 
Willcox,  its  president;  R.  Suydam  Grant;  George  1.  Wilber; 
Dumont  Clarke,  President  of  the  American  Exchange  National 
Bank ;  James  A.  Linen,  Scranton,  Pa. ;  William  S.  Opdyke,  gen- 
eral counsel  of  the  road,  and  E.  H.  Harriman,  President  of  the 
Union  Pacific.  In  1907  Mr.  W^illcox  resigned  as  president  of  the 
D.  &  H.  and  was  succeeded  by  Leonor  F.  Loree,  Chairman  of  the 
Executive  Committee  of  the  Kansas  City  Southern,  and  formerly 
president  of  the  Rock  Island,  and  the  Baltimore  &  Ohio. 

Until  its  purchase  of  the  Hudson  Valley  and  other  traction 
lines,  the  Delaware  &  Hudson  had  no  holdings  other  than  in  its 
underlying  companies,  nor  are  other  roads  known  to  be  very 
large  holders  of  its  stock.  It  belongs  in  a  general  way  to  the 
combination  of  railroads  which  has  done  away  with  rate  wars, 
but  beyond  this  it  is  considered  an  independent  line. 

Capitalization. 

Since  the  Delaware  &  Hudson  gives  in  its  report  a  list  of  the 
underlying  securities,  it  is  possible  to  make  up  its  capital  sheet 
from  the  company's  own  figures.  As  of  January  1st,  1907,  this 
stood  as  follows : 


DELAWARE  &  HUDSON  265 

Stock $40,989,000 

Funded   Debt 22,450,000 

Nominal  capital $63,439,000 

Underlying  stocks  and  bonds 47,344,000 

Gross   capitalization $110,783,000 

Securities  held 25,679,447 

Coal  property 13,436,561 

Approx.  net  capitalization $71,666,992 

Approx.  net  capit.  per  mile $85,014 

Average   miles   operated 843 

Net  earnings  on  net  capital 9.4% 

Stock  on  net  capitalization 56% 

Fixed  Charges  on  Total  Net  Income  40% 

Factor  of  Safety 00% 

In  1906  the  Delaware  &  Hudson  paid  approximately  $2,- 
500,000  on  the  $47,344,000  of  underlying  securities.  This  was 
equivalent  to  an  average  of  more  than  5%.  It  follows,  therefore, 
that  had  the  amount  paid  been  capitalized  on  a  4%  basis  as 
elsewhere  in  this  book,  the  figure  for  gross  capitalization  would 
have  been  somewhat  higher.  This  is  to  be  borne  in  mind  in 
comparison  of  the  D.  &  11.  with  other  roads. 

On  the  other  hand,  in  its  balance  sheet  the  Delaware  &  Hud- 
son puts  a  valuation  on  its  coal  properties  of  $13,436,561  and  this 
amount,  together  with  securities  held  and  advances  to  other 
companies  has  been  deducted  in  order  to  approximate  the  net 
capitalization  of  the  railway  proper.  After  depreciation  charges 
of  5c.  per  ton  on  coal  produced,  the  Sales  Department  earned  net 
$1,828,985  in  1904,  $1,790,699  in  1905,  and  $1,049,498  in  1906,  so 
that  the  company's  valuation  on  its  coal  properties,  equivalent  to 
about  6c  per  ton  on  its  own  estimate  of  unmined  coal,  was  low 
and  its  earnings  on  this  amount  were  high. 

On  the  basis  of  the  above  estimate  it  will  be  seen  that  the 
approximate  net  capitalization  is  in  the  neighborhood  of  $85,000 
per  mile  and  that  the  net  earnings,  excluding  earnings  of  the  coal 
department,  showed  9.4%  on  this  capitalization.  This  figure 
stands  against  a  similar  estimate  of  8.1%  for  the  Pennsylvania, 


266 


DELAWARE  &  HUDSON 


13.7%  for  the  Lackawanna,  10.8%  for  the  Reading  and  5.8%  for 
the  New  York  Central. 

Stock  represented  more  than  one-half  of  the  estimated  net 
capitalization  and  fixed  charges  in  1906  consumed  40%  of  the 
total  net,  leaving  a  wide  Factor  of  Safety  for  the  underlying 
securities. 

Increase  of  Capitalization. 

In  1889  the  company  adopted  the  plan  of  setting  aside  a 
sinking  fund  of  5c.  per  ton  on  all  the  coal  mined,  the  proceeds 
being  used  for  the  purchase  and  retirement  of  the  capital  stock 
of  the  road.  By  this  means  the  capital  stock  had  been  reduced  to 
$34,000,000  in  1903,  but  since  then,  stock  increases,  principally  for 
the  retirement  of  underlying  bonds  and  the  company's  own 
debentures,  have  more  than  offset  these  purchases  for  the  sink- 
ing fund. 

From  1900  to  the  close  of  1906  the  increase  of  capital  and 
earnings  compared  as  follows  : 


Year 

• 
Common 
Stock 

Funded 
Debt 

Total 

Securities 
Held 

Gross 
Earnings 

1900 

$34  ,793  ,20f 
40  ,9S9  ,001 

$7,500,000 
22  ,450 ,000 

$42  ,293  ,200 
63,439,000 

$11  ,485,188 

1906 

24,013,86( 

17,050,029 

Net  increase  over  six  years :  Nominal  capital,  50%  ;  gross 
earnings,  49%. 

To  provide  for  the  retirement  of  $7,000,000  6%,  and  $3,- 
000,000  7%  bonds  of  the  Albany  &  Susquehanna,  $10,000,000  of 
3/^%  bonds  were  offered  to  stockholders  of  the  D.  &  H.  at  par 
in  1905.  These  bonds,  like  the  $14,000,000  of  Delaware  &  Hud- 
son debentures  sold  in  1906,  are  convertible  into  stock  of  the 
D.  &  H.  at  $200  per  share.  The  conversion  of  all  these  securi- 
ties would  add  $12,000,000  to  the  capital  stock  of  the  road,  at  the 
same  time  reducing  fixed  charges  by  the  amount  of  the  interest 
paid. 

It  will  be  seen  that  apparently  the  increase  of  capital  was 
more  rapid  than  the  increase  of  earnings,  but  the  larger  part  of 
the  increase  of  capital  went  to  the  purchase  of  securities  in  other 
roads  so  that  in  reality  the  earnings  increased  about  50%,  on  a 
very  slight  increase  of  actual  capital. 

On  June  15th,  1906,  debentures  of  the  company  were  issued 


DELAWARE  &  HUDSON 


267 


to  the  amount  of  $14,000,000,  more  than  tripling  the  nominal 
funded  debt.  Each  debenture  of  $1,000,  par  value,  is  convertible 
into  five  shares  of  the  stock  of  the  company  between  1907  and 
1912;  that  is,  at  an  exchanging  value  of  $200  per  share  for  the 
stock  of  the  company.  In  order  to  provide  for  such  conversion, 
an  increase  of  $7,000,000  in  the  stock  of  the  company  was 
authorized.  The  sums  derived  from  these  debentures  were  used 
chiefly  in  the  purchase  of  new  equipment,  stock  in  the  Quebec, 
Montreal  &  Southern,  of  traction  lines,  etc. 

Securities  Held. 

The  item  of  securities  held  includes  a  miscellany  of  stocks 
and  bonds  °f  various  small  railroads  and  coal  and  iron  companies. 
The  interest  on  investments  for  1906  amounted  to  $1,047,863, 
which  was  about  4%  on  the  book  valuation  of  the  securities. 
There  were  no  considerable  equities  in  these  holdings,  save  possibly 
in  some  undeveloped  iron  properties. 

Stability  of  Earnings. 

In  1906  the  coal  traffic  contributed  57%  of  the  total  freight 
tonnage,  as  against  62%  in  1905,  53%  in  1904,  58%  in  1903, 
44%  in  1902  and  58%  in  1901.  The  balance  of  freight  traffic  was 
distributed  over  a  wide  variety  of  items.  In  1906  passenger  earn- 
ings contributed  19%  to  the  gross  rail  earnings. 

It  will  be  seen  from  the  above  how  vitally  the  prosperity  of 
the  road  is  bound  up  with  the  coal  industry,  and  especially  of 
anthracite  mining.  In  1902,  in  consequence  of  the  strike,  the 
gross  rail  earnings  fell  off  $2,400  per  mile,  and  the  surplus  avail- 
able for  dividends  decreased  from  12.6%  in  1901  to  7.2%  in  1902, 
a  drop  of  about  40%. 

Since  this  period  the  earnings  have  increased  rapidly,  the 
rail  earnings  amounting  in  1906  to  $20,225  per  mile.  The  following- 
table  shows  the  rail  earnings  since  the  formation  of  the  present 
company,  the  gross  earnings  of  the  coal  department  not  being 
included  in  this  table  as  is  done  in  the  company's  reports: 


Year 

Miles 
Operated 

Gross 
Earnings 

Earnings 
Per  Mile 

1900 

660 
661 
689 
769 
843 
843 
843 

$11  ,485,189 
12,17S,683 
11  ,050,690 
13,642,953 
15,071,124 
16,382,074 
17,050,029 

$17,018 

1901 

18,424 

1902 

16,038 

1903 

17,441 

1904 

17  ,880 

1905 

19,433 

1906 

20,225 

268 


DELAWARE  &  HUDSON 


Maintenance. 


Over  a  series  of  years  the  traffic  density  and  maintenance 
charges  of  the  road  have  compared  as  follows : 


Maintenance  per  Mile 

Year 

Traffic  Density 

Total 

Way 

Equipment 

1900 

1  ,746  ,742 

$1,561 

$1  ,441 

$3  ,002 

1901 

1,928,156 

1,804 

1,655 

3,459 

1902 

1,682,598 

1,965 

1,805 

3,770 

1903 

2,101,858 

2,052 

1,803 

3,855 

1904 

2,114,585 

2,046 

1,868 

3,914 

1905 

2 ,500  ,234 

1,731 

2,235 

3,966 

1906 

2,550,934 

1,663 
$1,831 

2,391 

4,054 

Average 

2,089,301 

$1 ,885 

$3,716 

Erie 

2,434,819 

1,861 

3,216 

5,077 

N.Y.C.  &St.L. 

2,599,902 

2,156 

2,059 

4,215 

B.  &  0 

2,282,704 

1,876 

2,416 

4,292 

Lehigh  Valley . 

2,771,846 

2,588 

3,429 

6,017 

The  Delaware  &  Hudson,  being  largely  a  coal  road,  its 
earnings  have  been  compared  with  four  others  of  somewhat 
the  same  character  of  traffic.  It  will  be  seen  that,  traffic  density 
compared,  its  charges  have  been  well  up  to  the  standard  of 
of  the  four  other  roads  shown  and  the  standard  of  these  four 
roads  is  exceptionally  high.  A  maintenance  charge  of  $4,000 
per  mile  in  1906  should  be  amply  sufficient  to  maintain  the  road  at 
a  point  of  high  efficiency. 

Improvements  from  Earnings. 

The  company  has  no  special  improvement  fund,  but  for 
years  large  amounts  have  been  charged  off  from  profit  and  loss 
and  devoted  to  betterment  work.  In  1905,  $800,000  was  so  de- 
voted to  mining  plant  and  $503,642  to  equipment.  In  1906, 
$1,592,683  was  charged  off  for  equipment,  $884,910  for  new 
railroad  construction,  $262,662  for  unmined  coal  and  $239,918 
for  advances  for  unmined  coal. 


Surplus  Earnings. 

Before  charging  off  these  amounts,  the  surplus  for  a  series 
of  years  has  shown  as  follows : 


DELAWARE  &  HUDSON 


269 


Year 

Surplus 

Per  cent. 

Earned  on 

Common 

! 
Dividends   j     Average 
Paid  on            pr{Ce 
Common 

1900 

$2,958,429                8.5 
4,370,706               12.6 
2,497,874                7.2 
6,205,156              18. 
5,256,446               12.8 
5,707,743              13.9 

5 

7 
7 
7 
7 
7 
7 

121 

1901 

164 

1902 

173 

1903 

166 

1904 

1905 

169 
201 

1906 

5,301  ,622 

216 

It  will  be  seen  that  the  surplus  for  1906  was  slightly  smaller 
than  1905,  this  being  due  largely  to  a  decrease  of  $741,201  in  net 
earnings  of  the  coal  department. 

Dividend  Record. 

The  company  passed  through  a  period  of  difficulties  in  the 
years  prior  to  1880,  but  in  1881  dividends  were  resumed  and 
have  since  been  paid  regularly  through  more  than  a  quarter  of  a 
century,  as  follows : 

Year.  Dividend. 


1881... 
1882-4 . 
1885... 
1886-7 . 
1888... 
1889-96 
1897-00 
1901-6 . 
1907... 


4^% 

7 

6 

5 

6 

7 

5 

7 

9 


Coal  Operations. 

A  very  considerable  part  of  the  company's  business  is  the 
mining,  as  well  as  the  carriage,  of  anthracite  coal,  and  from 
1903  the  gross  and  net  earnings  (after  depreciation  charge)  of  the 
Sales  Department  have  compared  as  follows : 

Gross.  .  Net. 

1901 $16,924,932  $1,173,938 

1902 1 1,064,748  728,009 

1903 20,183,231        3,366,073 

1904 19,032,414        1,828,986 

1905 20,214,296        1 ,790,699 

1906 18,571,342        1,049,498 


270  DELAWARE  &  HUDSON 

The  depreciation  charge  of  5c.  on  all  coal  produced  is  charged 
against  operating  expenses  and  turned  into  a  sinking  fund,  this 
charge  amounting  to  $238,338  in  1906  and  $250,260  in  1905. 

During  1906  the  company  produced  5,401,389  tons  as  against 
5,695,493  tons  in  1905. 

The  net  profits  of  1906  amounted  to  19c.  per  ton  produced 
as  against  31c.  per  ton  in  1905.  The  reduced  earnings  of  1906 
were  due  to  a  slight  decrease  in  product,  higher  costs  and  to  the 
decreased  revenue  from  coal  sales.  This  decrease  shows  the 
highly  variable  profits  of  this  industry. 

The  estimated  amount  of  coal  owned  and  controlled  January 
lst,  1907,  was  207,000,000  tons.  If  this  were  figured  at  an 
average  value  of  10c.  per  ton  (the  company's  book  valuation  is 
about  6c),  this  would  represent  an  asset  of  around  $20,000,000 
or  equivalent  to  about  one-half  of  the  company's  outstanding 
capital  stock.  The  average  net  profits  of  the  company  from  its 
Sales  Department  for  the  six  years  were  equivalent  to  8%  on 
this  sum. 

The  Balance  Sheet. 

As  of  December  31st,  1906,  the  balance  sheet  showed: 

Current  Assets $6,329,878 

Current  Liabilities 4,814,354 

Leaving  a  working  balance  of $1,515,524 

The  amount  of  cash  on  hand  was  $1,026,799  and  the  balance 
to  credit  of  profit  and  loss  was  $7,483,281. 

Investment  Value. 

For  a  series  of  years  the  surplus  earnings  shown  by  the 
D.  &  H.  have  averaged  above  12^4%,  while  the  average  dividend 
payments  has  been  under  7%.  The  market  price  of  the  stock 
has  steadily  risen  from  an  average  price  of  $121  in  1900  to  $216 
in  1906.  The  low  price  of  1903-4  was  $149,  the  high  price  of 
1906  $234.  and  in  May,  1907,  it  sold  as  low  as  $160. 

On  the  7%  basis  of  1906,  at  the  average  price  of  that  year, 
the  yield  to  the  investor  was  less  than  3^>%.  It  is  a  little  diffi- 
cult to  understand  these  high  quotations.  The  Delaware  & 
Hudson  has  been  very  liberally  maintained,  but  hardly  more  so 
than  other  roads  like  the  Erie,  the  Lehigh  Valley,  and  other 
similar  roads.     There  is  little  in  the  published  accounts  to  in- 


DELAWARE  &  HUDSON  271 

dicate  that  it  is  actually  earning  25%  on  its  stock,  as  has  been 
claimed.  So  far  from  that  it  is  not  clear  that  in  1906  any  very 
large  sums  were  concealed  in  operating  expenses  and  the  nominal 
surplus  shown  was  probably  much  nearer  the  actual  earnings  of 
the  company. 

The  proportion  which  a  9%  dividend  bears  to  its  nominal 
surplus  of  1906  (about  12%)  is  high,  and  when  it  is  borne  in 
mind  that  during  the  coal  strike  of  1902  the  surplus  earnings 
were  cut  nearly  in  half,  the  wisdom  of  the  increase  in  dividend 
is  not  clear.  It  is  certainly  on  nothing  like  so  solid  a  basis  as 
was  the  7%  dividend  and  even  that  dividend  was  threatened  by 
the  slump  in  earnings  of  1902. 

It  is  unquestionable  that  the  price  of  all  the  coaler  stocks 
has  been  greatly  influenced  by  the  spectacular  rise  in  Lacka- 
wanna and  in  lesser  measure  by  the  rise  in  Reading.  But  after 
heavy  maintenance  charges  the  Lackawanna  in  1906  was  earn- 
ing 40%,  and  paying  out  only  half  of  this  in  dividends.  Reading 
was  earning  conservatively  about  14^2%  and  paying  4%.  When 
it  is  considered  how  vitally  the  Delaware  &  Hudson's  earnings 
are  dependent  upon  the  prosperity  of  the  coal  industry,  and  tha^ 
this  means  not  merely  the  prevention  of  strikes,  but  the  main- 
tenance of  prices  and  the  continuance  of  general  prosperity  as  well, 
it  would  seem  that  the  stock  can  hardly  be  regarded  otherwise 
than  as  a  low  yield  investment  with  a  rather  high  risk.  That 
a  reversion  from  prosperous  conditions  can  easily  take  place  is 
evident  enoug'h  from  the  influence  of  the  labor  troubles  in  the 
spring  of  1906,  as  reflected  in  the  report  of  the  road  for  the 
spring  quarter.  Three-fourths  of  the  surplus  shown  in  the  corres- 
ponding quarter  of  1905  was  wiped  out. 

On  a  9%  basis  there  is  considerable  inducement  to  exchange 
the  $24,000,0000  of  outstanding  convertibles,  and  this  conversion, 
while  reducing  the  fixed  charges,  would  add  over  a  million  dollars 
to  the  dividend  requirements,  or  an  increase  of  more  than  25%. 

With  its  purchase  of  the  Quebec  Southern  and  the  exten- 
sions contemplated,  the  Delaware  &  Hudson  will  add  to  its 
mileage  by  about  a  quarter  and  very  considerably  extend  its 
range  of  influence.  It  seems  highly  probable,  therefore,  that 
its  general  rail  earnings  will  continue  to  increase,  so  that  rela- 
tively the  company  will  be  less  dependent  upon  a  single  industry 
for  its  business.  But  it  will  be  noted  that  its  coal  profits  have 
shown  a  steady  decrease  since  the  quite  unusual  figure  of  1903, 


272  DELAWARE  &  HUDSON 

and  in  view  of  the  Delaware  &  Hudson's  high  degree  of  depend- 
ency upon  this  single  industry,  the  conservative  investor  will 
probably  conclude  that  the  investment  yield  on  such  a  stock 
should  be  considerably  higher  than  that  on  such  standard  stocks 
as  the  Pennsylvania,  the  New  York  Central,  etc.  He  will  find  it 
difficult  to  understand  why,  for  example,  Delaware  &  Hudson 
should  sell  at  much  more  than  25%  premium  above  the  Penn- 
sylvania. 


DELAWARE,  LACKAWANNA  AND  WESTERN 

RAILROAD. 

The  "Lackawanna,"  as  it  is  familiarly  known,  is  one  of  the 
great  anthracite  "coalers,"  and  one  of  the  three  largest  holders 
of  anthracite  coal  lands.  It  is  one  of  the  wealthiest  and  best  con- 
ducted railroads  in  America,  and  is  probably  the  only  great  road 
in  the  world  which  practically  earns  half  its  stock  capital  over 
again  each  year.  Its  main  line  runs  from  New  York  City  through 
the  anthracite  coal  regions  to  Buffalo,  and  considerably  over  one- 
half  of  its  traffic  is  anthracite  coal.  With  other  coal  and  coke, 
this  comprises  about  60%  of  the  road's  total  traffic.  It  is 
therefore  highly  dependent  upon  the  prosperity  of  the  coal 
industry  for  its  own  prosperity,  and  since  the  award  of  the 
Anthracite  Commission  in  1902,  its  net  earnings  have  increased 
enormously. 

History. 

The  road  represents  the  consolidation,  in  1853,  of  two  small 
roads,  and  it  was  opened  throughout  in  1856.  It  has  since  ac- 
quired under  lease  the  New  York,  Lackawanna  and  Western  (214 
miles),  the  Morris  and  Essex  (157  miles),  and  several  other  small 
roads.  The  road  was  operated  mainly  as  a  coal  carrier  until 
1882,  when  the  line  from  Binghamton  to  Buffalo  was  built,  and 
the  company  entered  the  field  as  a  competior  of  the  trunk  lines 
between  New  York  and  the  Great  Lakes.  Its  mileage  has  not 
changed  in  the  last  ten  years. 

Ownership. 

No  single  interest  controls  the  road  absolutely;  practical 
control  is  divided  between  the  Vanderbilt  family  and  the  Stand- 
ard Oil  interests.  On  its  board  of  managers  the  Vanderbilt  in- 
terests are  represented  by  Frederick  W.  Vanderbilt  and  H.  McK. 
Twombly ;  the  Standard  Oil  interests  by  William  Rockefeller, 
John  D.  Rockefeller  Jr.,  and  James  Stillman,  president  of  the 
National  City  Bank.  The  First  National  Bank  is  represented  by 
George  F.  Baker,  president,  Harris  C.  Fahnestock,  vice-president, 
and  Wm.  H.  Moore,  financial  head  of  the  Rock  Island  system. 

!*  (273) 


274         DELAWARE,   LACKAWANNA  &  WESTERN 

Closely  associated  with  the  Standard  Oil  interests  is  Samuel 
Sloan,  chairman  of  the  Executive  Committee,  and  long  the  presi- 
dent of  the  road,  and  now  the  vice-president  of  the  National  City- 
Bank.  The  other  directors  are,  Moses  Taylor  Pyne  and  H.  A.  C. 
Taylor,  representing  the  Moses  Taylor  estate ;  J.  Rogers  Max- 
well, chairman  of  the  Executive  Committee  of  the  Central  Rail- 
road of  New  Jersey;  Eugene  Higgins,  and  Frank  Work.  The 
Executive  Committee  comprises  Samuel  Sloan,  H.  McK. 
Twombly,  William  Rockefeller.  G.  F.  Baker,  M.  T.  Pyne,  and 
William  H.  Truesdale,  president. 

Affiliations. 

The  Lackawanna,  though  not  one  of  the  larger  railroads  of 
the  country,  is  exceptionally  independent,  and  has  comparatively- 
slight  direct  affiliations  with  any  other  road.  It  is  not  extensively 
interested  in  other  roads,  and  its  holdings,  outside  of  the  stocks 
and  bonds  of  underlying  companies,  are  not  large.  It  does  not 
figure  especially  as  a  member  of  the  New  York  Central-Penn- 
sylvania "Community  of  Interest"  organization,  though  through 
the  Vanderbilt  and  Standard  Oil  holdings,  it  is  very  closely 
associated  with  the  New  York  Central,  and  is  practically  under 
the  same  ownership. 

Capitalization. 

As  of  Jan.  1,  1907,  the  capital  account  stood  as  follows : 

Stock $26,200,000 

Funded  Debt 3,067,000 

Stocks  &  Bonds  of  leased  lines 91,172,410 

Total    capital $120,439,410 

Securities    held 18,191,813 

Approx.   net  capitalization $102,247,597 

Approx.  net  capit.  per  mile    $132,789 

Average   miles   operated    770 

Net  earnings  on  net  capital 13.7% 

Stock  on  net  capitalization 25% 

Fixed  charges  on  Total  Net  Income 38% 

Factor  of  Safety   62% 


DELAWARE,  LACKAWANNA  &  WESTERN         275 

It  will  be  seen  that  the  nominal  capital  is  small  as  compared 
with  the  total  valuation  of  the  operated  mileage,  and  the  amount 
paid  in  rentals  on  the  underlying  railroads  is  comparatively  very 
high. 

Of  the  $18,000,000  of  securities  held,  those  of  underlying- 
leased  roads  amounted  to  $6,363,350  par  value.  From  the  latter 
it  derives  4%  interest  and  from  its  total  holdings  the  same. 

The  Lackawanna  has  no  large  equities  in  other  roads. 

The  net  earnings  represent  13.7%  on  the  estimated  net 
capitalization,  as  against  8.1%  for  the  Pennsylvania,  and  5.8%  for 
the  New  York  Central.  As  compared  with  these  two  roads, 
therefore,  the  estimated  capitalization  is  low. 

Coal  Lands. 

After  the  Reading,  the  Lackawanna  is  one  of  the  largest 
owners  of  anthracite  coal  lands  in  America.  The  government 
estimates  of  1904  placed  the  amount  of  unmined  coal  on  its 
lands  at  400,000,000  tons,  which  compares  with  a  similar  estimate 
for  the  Lehigh  Valley  Railroad  holdings,  and  of  $2,450,000,000 
tons  for  the  Reading.     These  are  the  highest  three. 

In  1906,  the  coal  operations  of  the  company,  including  its 
own  production  and  that  purchased  from  individual  operators, 
aggregated  9,172,743  tons,  a  very  slight  decrease  from  the  year 
before.  The  total  sales  for  the  year  aggregated  $36,542,736,  or 
an  average  of  $3.99  per  ton,  almost  identically  the  same  figure 
as  for  1905. 

Net  profits  from  coal  operations  were  $3,655,119,  or,  including 
$609,021  expended  for  improvements,  $4,264,140.  Taking  the 
latter  figure,  this  was  an  average  of  46c.  per  ton  net  profit, 
which  was  a  slight  decrease  from  the  proceding  year. 

If,  as  has  been  done  in  the  estimates  of  other  anthracite 
coal  holdings,  the  Lackawanna's  unmined  coal  were  taken  at  no 
more  than  10c.  per  ton,  its  valuation  would  still  be  around 
$40,000,000.  It  may  be  assumed  that  the  actual  value  of  these 
holdings  is  considerably  above  this  minimum  estimate.  If 
the  net  profits  for  1905-6,  after  charging  off  very  considerable 
sums  for  improvements,  were  averaged  and  capitalized  on  no 
more  than  a  6%  basis,  this  would  give  a  valuation  to  the  com- 
pany's coal  property  of  around  $50,000,000.  It  is  probably 
actually  not  much  less  than  this  and  quite  possibly  considerably 
more. 


276         DELAWARE,  LACKAWANNA  &  WESTERN 

This  is,  of  course,  considering  the  coal  property  quite  apart  from 
its  position  as  a  tributary  to  the  earnings  of  the  road.  Actually, 
for  1906,  and  for  several  years  preceding,  the  transport  of  coal 
contributed  one-half  of  the  entire  freight  traffic  of  the  road  and 
the  earnings  per  ton  were  very  considerably  higher  than  on 
merchandise  traffic.  The  average  ton  mile  rate  on  the  coal 
traffic  was  .87c.  as  against  an  average  merchandise  rate  of  .69c. 
and  the  rail  earnings  per  ton  of  coal  transported  were  $1.50 
per  ton  as  against  $1.08  per  merchandise  ton. 

These  coal  rates  were  undoubtedly  high,  though  they  have 
not  increased  from  the  general  bed-rock  year  of  1899.  But  the 
average  ton  mile  rate  compares  with  an  average  rate  on  all 
traffic  on  the  Norfolk  &  Western,  for  example,  of  only  .48c.  per 
ton  and  a  somewhat  similar  rate  on  the  Chesapeake  &  Ohio  and 
the  Baltimore  &  Ohio.  Such  figures  could  be  obtained  only  from 
what  amounts  practically  to  an  absolute  monopoly  of  the  anthra- 
cite coal  business,  and  it  is  this  fact  which  gives  an  element  of 
instability  to  the  earnings  of  the  Lackawanna  and  other  anthra- 
cite coalers. 

Style  of  Capitalization. 

The  amount  of  bonds  issued  directly  by  the  Lackawanna, 
$3,067,000,  stands  against  $26,200,000  of  common  stock.  The 
common  stock  represents  only  25%  of  the  estimated  net  capitali- 
zation, as  against  33%  for  the  New  York  Central,  and  53%  for 
the  Pennsylvania.  This  would  ordinarily  be  very  low,  but  the 
earnings  of  the  road  are  extraordinarily  high.  Thus  Fixed 
Charges  represented  only  38%  of  the  total  net  income,  which  ac- 
cording to  the  method  here  employed,  represents  a  Factor  of 
Safety  of  62%  for  the  underlying  securities.  That  is  to  say,  the 
net  income  of  the  road  could  decline  by  three-fifths  before  the 
interest  and  rental  paying  power  of  the  road  was  impaired.  This 
compares  with  a  Factor  of  Safety  of  only  about  36%  on  the 
New  York  Central,  and  with  62%  on  the  Pennsylvania. 

The  approximate  Net  Capitalization  per  mile  of  road  opera- 
ted is  high  ;  its  $132,789  compares  with  an  estimate  of  $145,566 
for  the  Pennsylvania,  of  $123,188  for  the  New  York  Central.  If 
the  rentals  paid  by  the  Lackawanna  had  been  capitalized  at 
4%,  as  has  been  done  in  the  case  of  the  other  two  roads,  instead 
of  taking  the  actual  amount  of  the  stocks  and  bonds  of  the 
leased  roads,  as  was  possible  from  the  Lackawanna  reports,  but 


DELAWARE,  LACKAWANNA  &  WESTERN         211 

not  for  the  other  roads,' this  estimate  would  he  raised  considerably. 
But  on  the  other  hand  no  account  is  taken  of  the  value  of  the 
Lackawanna's  coal  holdings,  which  might  reduce  the  estimated 
net  capitalization  by  perhaps  50%. 

Increase  of  Capitalization. 

The  nominal  capital  of  the  road  has  not  changed  in  the  six 
years,  while  its  gross  earnings  have  increased  more  than  50% 
as  follows : 


Year 

Common 
Stock 

Funded 
Debt 

Total 

Gross 
Earnings 

1900 

1906 

$26  ,200  ,000 
26  ,200  ,000 

$3,067,000 
3  ,067  ,000 

$29  ,267  ,000 
29,267,000 

$20  ,887  ,763 
32  ,962  ,880 

Net  increase  over  six  years:  Nominal  Capital,  nil;  Gross 
Earnings,  56%. 

Character  of  Traffic. 

As  already  noted,  some  60%  of  the  Lackawanna's  traffic  is 
represented  by  the  coal  business  of  the  road.  The  following 
tables,  prepared  by  the  Wall  Street  Journal,  show  Lackawanna's 
percentage  of  gains  in  earnings  from  its  three  principal  sources : 


Gross  earn. 

Gross  earn. 

Gross  earn. 

Year. 

from  coal. 

gen.  mdse. 

passenger. 

1905 . . . 

$13,993,585 

$9,230,787 

$5,529,002 

1904... 

13,230,870 

8,337,823 

5,215,919 

1903... 

13,826,844 

8,354,908 

5,083,142 

1902... 

8,145,920 

7,013,424 

4,592,036 

1901 . . . 

10,709,344 

6,668,689 

4,522,383 

1900. . . 

8,535,324 

6,660,186 

4,186,232 

1899... 

9,407,796 

6,300,149 

3,951,051 

Increase  six  yrs. 

$4,585,789 

$2,930,638 

$1,577,951 

Per  cent,  increase 

48% 

46% 

39% 

That  rates  have  in  the  period  referred  to  affected  the  ques- 
tion of  increased  earnings  but  little,  one  way  or  the  other,  is  evident 
from  the  following : 


278        DELAWARE,  LACKAWANNA  &  WESTERN 


Rate  per  ton  mile  (cents) 


Year. 

Coal. 

Mdse. 

Pass. 

1905.... 

.  .  .      0.87 

0.68 

1.42 

1904.... 

. .  .     0.86 

0.70 
0.70 

1.41 

1903.... 

.  . .     0.86 

1.43 

1902.... 

...      1.11 

0.70 

1.45 

1901 

.  . .      0.89 

0.68 

1.41 

1900.... 

. . .     0.92 

0.69 

1.48 

1899 

0.94 

0.67 

1.51 

Inc.  in  6 

years. . . 

.  . .     0.07 

0.01 

*0.09 

Inc.  per 

cent. . . . 

...?y2% 

\y2% 

*6% 

^Decrease. 

The  tonnage  of  merchandise  has  increased  about  equally 
with  that  of  coal,  but  it  is  the  ton  mileage  figures  on  coal  that 
show  a  large  gain,  offering  some  explanation  of  the  larger  gain 
in  coal  traffic  receipts.  The  passenger  traffic  has  shown  a  gain  of 
nearly  50%. 

Stability  of  Earnings. 

Despite  the  fact  that  the  road  is  so  closely  dependent  on  a 
single  industry,  its  traffic  earnings  have  been  remarkably  steady, 
though  since  the  settlement  of  the  coal  strike  by  the  Commis- 
sion of  1902  they  have  shown  a  very  heavy  increase,  as  will  be 
seen  from  the  following  table ;  they  averaged  around  $22,000,000 
per  year  from  1896  to  1903,  and  then  jumped  by  almost  half. 


Year 


1896. 
1897. 
1898. 
1899. 
1900. 
1901. 
1902. 
1903. 
1904. 
1905. 
1906. 


Miles 
Operated 


Gross 
Earnings 


771 
771 
771 
771 
771 
771 
771 
770 
770 
770 
770 


$21  ,403 
21  ,002 
22,168 
21  ,325 

20  ,887 
23,507 

21  ,398 
29,180 
28,701 
31,951 
32  ,962 


,506 
,017 
,344 
122 
J63 
,634 
,764 
,964 
,991 
,063 
,880 


Gross 
Earnings 
Per  Mile 

$27,756     | 
27  ,239 
28,752] 
27  ,659 
27,091 
30,481 
27  ,754 
37 ,897     * 
37,275  3 

41  ,496 

42  ,888 


It  will  be  seen  that  the  company's  earnings  are  largely  de- 
pendent upon  the  maintenance  of  the  present  amicable  conditions, 
and  the  prosperity  of  the  road  therefore  hangs  very  closely  upon 


DELAWARE,  LACKAWANNA  &  WESTERN         279 


the  ability  of  the  management  to  maintain  the  present  satisfac- 
tory arrangements  with  its  operatives.  A  coal  strike  would  affect 
its  earnings  profoundly. 

Maintenance. 

The  traffic  density  of  the  road  is  very  high,  amounting  for 
1906  to  3,868,000  ton  miles  per  mile  of  road  operated.  The  aver- 
age for  seven  years  was  3,163,000  as  compared  with  4,130,000  for 
the  Pennsylvania. 

Maintenance  charges  with  the  Lackawanna  have  for  years 
been  very  large,  as  the  table  below  will  show.  For  1906  they 
amounted  to  $10,190  per  mile  of  road  operated,  a  figure  which  is 
surpassed  only  by  the  Pennsylvania.  For  a  series  of  years  the 
figures  were  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 
per 
Mile 

Way 

Equipment 

1900 
1901 
1902 
1903 
1904 
1905 
1906 

2,445,032 
2,832,759 
2  ,247  ,883 
3,598,454 
3,526,933 
3,826,713 
3,868,820 

$3  ,996 
4,288 
4,388 
4,738 
5,085 
6,034 
6,412 

$3  ,601 
3,183 
3,518 
3,627 
3,815 
3,734 
3,778 

$7  ,597 
7,471 
7,906 
8,365 
8,900 
9,768 

10,190 

Average 

3,163,799 

$4,991 

$3,608 

$8,599 

Erie 

2,588,317 
4,130,690 
3,420,895 

1,245 
3,752 
3,033 

2,890 
5,232 
5,181 

4,733 

Penn 

8,984 

Reading 

8,215 

Extra  track,  480  miles. 

Improvements  from  Earnings. 

The  policy  of  setting  aside  large  sums  for  betterments  and 
renewals  has  been  pursued  for  a  series  of  years,  as  follows : 

1901 $2,523,127 

1902 3,058,148 

1903 4,319,166 

1904 3,446,719 

1905 3,587,485 

1906 5,551,618 


Total  for  six  years $22,486,263 

This  is  equivalent  to  86%  on  the  capital  stock. 


280 


DELAWARE,  LACKAWANNA  &  WESTERN 


In  addition  to  this,  the  following  extraordinary  expenditures 
are  reported  by  the  road  as  included  in  operating  expenses: 

1901 $1,228,954 

1902 1,632,737 

1903 1,478,106 

1904 1,715,523 

1905 2,281,881 

1906 2,174,936 


Total  for  six  years $10,512,137 

The  combined  sums  included  in  these  two  tables  ($32,998,- 
400)  were  equivalent  to  $42,855  per  mile,  or  rather  more  than 
the  entire  actual  cost  of  many  western  roads.  In  other  words, 
in  six  years,  the  working  part  of  the  road  has  been  practically 
reconstructed.  In  six  years  71,747  tons  of  80-lb.  steel  rails  have 
been  laid  on  957  miles  of  single  track  operated;  equipment  has 
been  increased  by  346  modern  locomotives,  6,000  box  cars  and 
5,000  coal  cars;  while  millions  of  dollars  have  been  spent  for  new 
terminals,  steel  bridges,  straightening  out  tracks  and  reducing 
grades. 

Surplus  Earnings. 

The  earnings  of  the  Lackawanna  on  its  capital  stock  have 
of  late  years  become  simply  enormous.  For  1906  they  were 
$5,827,071,  after  charging  off  $5,551,618  for  renewals  and  better- 
ments. Had  the  latter  been  included,  the  surplus  would  have 
represented  43%  on  the  capital  stock  of  the  road,  and  this  was 
after  high  maintenance  charges.  Deducting  betterments,  the 
remaining  surplus  still  represented  22.4%  on  the  stock.  For  a 
series  of  years,  the  items  compare  as  follows : 


Year 

Surplus 

Per  cent.           Dividends 
Earned  on           Paid  on 
Common            Common 

Average 
Price 

1900 

$2,560,381 
5,553,183 
2,711,496 
10,404,404 
10,220,590 
11,525,913 
11,378,689 

% 

9.5 
20.8 

i 

7 
7 

223 

1901 

222 

1902. . 

10.1                       7 
39.                         7 
38.4             7  (10  ext.) 
43.9              9} 
43.4 

273 

1903. . 

249 

1904. . 

282 

1905 

409 

1906    . 

504 

DELAWARE,  LACKAWANNA  &  WESTERN         28i 

Dividend  Record. 

The  Lackawanna  formerly  paid  10%  on  its  capital  stock,  but 
in  the  dull  years  of  1876-80,  the  dividends  were  passed.  In  the 
latter  year,  3%  was  paid;  in  1881,  6^4%;  in  1882-4,  8%;  early  in 
1885,  7y2%;  and  since  then  7%  yearly,  up  to  1904.  In  1904  an 
extra  dividend  of  10%  was  declared,  making  17%  in  all ;  in  1905 
the  road  was  placed  on  a  regular  10%  basis,  which  with  10% 
extra,  made  20%  for  the  year.    The  same  was  paid  in  1906. 

The  Balance  Sheet. 
As   of   December   31st,    1906,    the   balance   sheet,    excluding 
materials  and  advances  to  leased  roads,  showed : 

Current    Assets $9,859,449 

Current    Liabilities 7,825,581 

Leaving  Balance  of $2,033,868 

The  amount  of  cash  on  hand  was  $2,324,314  and  the  surplus 
to  credit  of  profit  and  loss  was  $24,395,584. 

From  this  it  would  appear  that  the  company  was  not  overly 
provided  with  ready  capital,  but  included  in  the  liabilities  was 
$1,534,184  of  rentals  not  yet  due,  and  in  addition  to  this,  the 
company  had  advanced  to  leased  and  controlled  roads,  $2,118,385. 

Investment  Value. 

The  Lackawanna  stock  sold  on  May  24th,  1906,  at  $560  per 
share,  about  the  highest  price  ever  known  for  any  road  of  con- 
siderable extent  in  this  country.  This  represented  a  rise  from 
$230  in  1903,  and  from  $171  in  1900.  The  highest  price  paid  in 
1902  was  $297.    The  average  for  1906  was  around  $500  per  share. 

On  a  20%  basis  this  represents  a  yield  to  the  investor  of 
only  4%,  with  time  money  ruling  at  5%  or  over.  On  its  face  this 
represents  a  seemingly  high  valuation  for  the  stock ;  on  the  other 
hand,  the  amount  paid  in  dividends  in  1906  represented  only  46% 
of  the  actual  earnings  on  the  stock,  even  after  a  more  liberal 
policy  as  to  betterments  and  improvements  than  is  pursued  in 
the  generality  of  roads.  The  company  states  that  in  its  operating 
expenses  for  1906,  $2,174,936  of  extraordinary  expenditures  was 
included,  and  this  with  the  $5,551,618  set  aside  for  renewals  and 
betterments,  represents  a  sum  largely  in  excess  of  the  dividend 
payments. 

Disregarding  the  extraordinary  expenditures  included  in 
operating  expenses,  the  20%  dividend  was  still  less  than  half  of 


282        DELAWARE,  LACKAWANNA  &  WESTERN 

the  actual  surplus  earned.  That  is  to  say,  the  surplus  could  be 
decreased  by  half  before  the  present  dividend  payments  would  be 
imperiled.  Virtually,  therefore,  over  and  above  the  20%  divi- 
dend, the  stock  represents  an  equity  on  the  basis  of  1906  earn- 
ings, of  rather  more  than  an  additional  20%.  It  is  this  which 
accounts  for  the  high  selling  price  of  the  stock. 

The  first  six  months  of  1906  showed  a  very  considerable  de- 
cline, due  to  the  coal  difficulties  in  the  Spring  of  the  year.  Gross 
earnings  for  the  spring  quarter  of  1906  showed  a  decline  of 
about  18%,  cutting  down  the  available  surplus  for  the  quarter 
by  60%.  Though  this  was  fully  made  up  later  in  the  year,  it 
will  be  seen  how  vitally  sensitive  Lackawanna  is  to  the  mainte- 
nance of  its  coal  operations.  A  similar  decline  for  the  whole 
year  would  have  wiped  out  the  larger  part  of  the  nominal  sur- 
plus, and  certainly  necessitated  a  heavy  cut  in  the  dividend,  and 
supposing  expenses  to  have  declined  proportionately,  would 
probably  have  put  the  road  back  on  a  7%  basis. 

Despite  its  enormous  earnings,  therefore,  Lackawanna  is  a 
highly  speculative  investment,  and  a  Factor  of  Safety  of  some- 
thing like  100%  on  its  present  dividend  is  none  too  small.  Set- 
ting aside  for  renewals  and  betterments  an  amount  equivalent 
to  about  20%  on  its  capital  stock,  is  no  more  than  careful,  con- 
servative management,  and  a  further  very  heavy  increase  in 
the  Lackawanna's  dividend  would  probably  be  regarded  a 
distinct  departure  from  its  excellent  traditions.  An  unbroken 
continuance  of  the  flush  times  of  the  last  three  years  can  scarce 
be  expected,  so  that,  putting  back  so  heavy  a  proportion  of  earn- 
ings into  the  road  is  simply  intelligent  anticipation  of  the  in- 
evitable rainy  day. 

From  the  foregoing  the  investor  should  be  able  to  make  up 
his  own  mind  as  to  the  value  of  the  stock.  It  seems  improbable 
that  at  $400  a  share  the  stock  would  actually  yield  more  than 
4%  on  the  investment  through  a  series  of  years.  On  the  other 
hand,  the  maintenance  of  this  dividend  rate,  barring  strikes, 
seems  not  improbable.  At  $400  per  share,  it  would  be  to  most 
investors  in  stocks  an  attractive  purchase.  Above  this  figure  it 
is  a  pure  gamble  on  the  continuance  of  prosperity  and  the  pre- 
vention of  strikes.  The  stock  is  closely  held  and  very  little  of 
it  is  thrown  upon  the  market,  even  in  pressing  times.  This  fact 
makes  it  very  easy  to  run  the  price  of  the  stock  up  to  a  high 
figure  on  comparatively  small  sales. 


DENVER  AND  RIO  GRANDE  RAILROAD. 

The  westernmost  portion  of  the  Gould  system  of  railways 
is  at  present  the  Denver  and  Rio  Grande,  which  carries  the  Gould 
lines  from  the  western  end  of  the  Missouri  Pacific  at  Pueblo,  in 
Colorado,  through  an  extensive  network  of  lines  to  Denver  on 
the  north,  and  to  Salt  Lake  and  Ogden  on  the  west.  The  system 
embraces  the  Denver  and  Rio  Grande  proper,  with  a  main  track 
from  Denver  to  Grand  Junction,  the  Rio  Grande  Western 
from  Grand  Junction  to  Salt  Lake  and  Ogden,  and  the  Rio 
Grande  Southern  Railroad,  operating  in  western  Colorado.  The 
latter  road,  is,  however,  under  separate  management. 

The  Rio  Grande  penetrates  the  rich  mineral  districts  of  the 
Rockies  and  extensive  coal  fields  as  well.  It  is  likewise  famous 
as  a  scenic  line  and  enjoys  a  large  tourist  traffic  on  this  account. 

With  the  completion  of  the  Western  Pacific,  which  is  being 
financed  through  the  Denver  and  Rio  Grande,  the  latter  will  be- 
come an  important  link  in  a  transcontinental  line.  At  the  pres- 
ent time  it  is  on  its  western  connections  completely  dependent 
upon  the  Union  Pacific  system,  now  hostile  to  it,  by  reason  of  the 
Western  Pacific  undertaking. 

History. 

The  Denver  and  Rio  Grande  has  had  a  tumultuous  history. 
Organized  in  1870,  its  earlier  years  were  mainly  a  series  of  fights, 
sometimes  in  the  courts,  but  more  often  in  the  canyons,  for 
feasible  rights  of  way  through  the  mountainous  territory  which 
it  occupies.  Originally  designed  to  extend  from  Denver  to  El 
Paso,  the  project  was  stopped  and  turned  westward  rather  than 
southward  through  a  treaty  of  peace  with  the  Atchison. 

For  a  considerable  time  the  Denver  and  Rio  Grande  enjoyed 
more  or  less  of  a  monopoly  of  its  territory,  but  this  was  broken 
through  the  building  of  the  Colorado  Midland  by  the  Atchison. 

(283) 


284  DENVER  &  RIO  GRANDE 

Increasing"  competition,  too  rapid  extension,  together  with  rank 
dishonesty  in  the  old  management  combined  to  throw  the  road 
into  the  hands  of  a  receiver  in  1886.  It  was  then  reorganized  as 
the  Denver  and  Rio  Grande  Railroad,  and  the  Fixed  Charges 
were  so  reduced  as  to  enable  the  company  to  weather  the  bad 
years  of  1893-7  without  a  second  receivership.  Meanwhile  the 
troubles  of  the  Atchison  threw  the  Colorado  Midland  into  a  re- 
ceiver's hands  and  with  the  ensuing  reorganization,  the  latter 
road  passed  to  the  joint  control  of  the  Colorado  Southern,  now 
a  part  of  the  Hawley  lines,  and  the  Rio  Grande  Western,  in 
turn  controlled  by  the  Denver  and  Rio  Grande. 

Originally  a  narrow  gauge  road,  the  larger  part  of  the 
system  has  been  changed  to  standard  gauge,  so  that  the  mileage 
now  stands  as  follows : 

Standard    Gauge 1,619  miles. 

Narrow    Gauge 913 

Total 2,532 

Double    track 62 

Ownership. 

After  having  been  operated  for  a  number  of  years  as  an 
independent  line,  the  Denver  passed  to  the  Gould  interests  in 
1901.  In  that  year  the  Missouri  Pacific  acquired  $7,300,000  of  the 
preferred  and  $14,800,000  of  the  common  stock.  It  is  understood 
that  the  Rockefeller  holdings  in  the  road  are  extensive,  and  that 
these,  with  the  Gould  and  Missouri  Pacific's,  are  sufficient  to 
ensure  control.  But  the  Rockefellers  are  not  openly  represented 
in  the  directorate  of  the  Denver,  nor  in  the  Colorado  Fuel  and 
Iron  Company,  an  industrial  corporation  closely  associated  with 
the  Denver  and  Rio  Grande  Railroad. 

The  board  of  directors  consists  of  George  J.  Gould,  chair- 
man, also  president  of  the  Missouri  Pacific ;  Edwin  Gould, 
Howard  Gould,  E.  T.  Jeffery,  president,  and  A.  Ii.  Calef,  asso 
ciated  in  various  Gould  enterprises ;  Winslow  S.  Pierce,  counsel, 
also  director  in  the  Wabash  and  other  Gould  roads;  Arthur 
Coppell,  of  Maitland,  Coppell  &  Co.,  bankers,  New  York;  Charles 
H.  Schlacks,  vice-president,  and  Joel  F.  Vaile,  general  counsel, 


DENVER  &  RIO  GRANDE  285 

Denver  Colo.    The  affiliations  are  now  exclusively  with  the  other 
Gould  lines. 

Up  to  1905,  Mr.  Harriman  was  represented  on  the  board  of 
the  Denver,  and  Mr.  Gould  in  his  turn  was  represented  in  the 
Union  Pacific.  These  relationships  were  broken  off  in  1905  when 
the  construction  of  the  Western  Pacific  was  begun. 

Capitalization. 
The  capitalization  of  the  road  on  June  30th,  1906,  stood  as 
follows : 

Common    stock $38,000,000 

Preferred   stock 45,712,700 

Total $83,712,700 

Funded    debt 78,221,100 

Nominal  capital $161,933,800 

Rentals  cap.  at  4% 5,050,000 

Approximate   Gross   capitalization $166,983,800 

Securities  held 35,727,400 

Approx.  net  capitalization $131,256,400 

Approx.  net  capital,  per  mile $52,990 

Miles    operated 2,477 

Net  earnings  on  net  capital ?.7^i- 

Stock  on  net  capital 65' fa 

Fixed  Charges  on  total  net  income....  52% 

Factor  of  Safety 48% 

For  a  road  with  gross  earnings  of  $7,500  per  mile,  the 
Denver  is  rather  heavily  capitalized,  but  this  is  generally  true  of 
the  Pacific  roads.  Its  capitalization  of  $52,990  per  operated  mile 
stands  against  $58,887  for  the  Atchison  and  a  somewhat  similar 
figure  for  Union  Pacific.  Net  earnings  on  the  estimated  capital 
show  only  5.7%,  which  for  a  western  road  means  a  relatively 
high  capitalization,  though  the  stock  represents  63%  of  the  esti- 
mated net  capitalization,  and  the  Fixed  Charges  consume  only 
52%  of  the  Total  Net  Income.  The  style  of  capitalization  there- 
fore, is  well  adapted  to  ward  off  another  visit  of  the  sheriff. 
Moreover  no  dividends  have  ever  been  paid  upon  the  $38,000,000 
of  common  stock,  this  latter  representing  merely  a  possible  ab- 
sorbent of  future  surplus. 


286  DENVER  &  RIO  GRANDE 

Equities  Owned. 

The  Denver  holds  in  its  treasury  the  entire  stock  of  the  Rio 
Grande  Western  Railroad.  The  two  roads  are  operated  together, 
and  the  bonds  of  the  latter  are  included  in  the  statement  of  the 
funded  debt  of  the  Denver.  The  Denver  owns  $3,158,237  stock  of 
the  Rio  Grande  Southern,  comprising  a  majority,  and  it  guarantees 
$2,277,000  bonds  of  the  latter  railway.  Other  minor  securities 
bring  up  the  total  as  carried  upon  the  books  to  $25,624,486.  Fur- 
ther securities  of  a  book  value  of  $9,768,063  are  deposited  with 
the  Morton  Trust  Company,  in  which  the  chief  item  is  $10,- 
000,000  stock  of  the  Utah  Fuel  Company.  These  securities  are 
deposited  as  collateral  for  certain  first  consolidated  mortgage 
bonds  of  the  Rio  Grande  Western  Railroad. 

Deducting  from  the  book  value  of  the  securities  owned,  the 
item  of  $20,750,000,  cost  of  the  stock  of  the  Rio  Grande  Western, 
whose  earnings  are  included  as  part  of  the  Denver's  earnings, 
we  have  a  net  of  $17,000,000  from  which  the  company  derived 
for  the  year  of  1906  an  income  of  $167,800,  or  less  than  one 
per  cent. 

With  the  completion  of  the  Western  Pacific,  the  Denver  & 
Rio  Grande  will  have  in  its  treasury  $50,000,000  of  stock  repre- 
senting no  money  outlay  other  than  such  as  may  be  necessary 
to  make  good  the  guarantees  which  are  given  in  payment  of  the 
stock. 

Increase  of  Capitalization. 

It  will  be  seen  from  the  following  table  that  in  the  six  years 
from  1900  the  capitalization  increased  by  half,  while  the  gross  earn- 
ings nearly  doubled. 


Common        Preferred         Funded  Gross 

Year  Stock  Stock  5%  Debt  Total  Earnings 

1899-0.  .  .    $38,000,000   $23,650,000'  $43,219, 500 '  $104,8G9,500J  $10,246,759 
1905-6...      38,000,000,     45,712,700      78,221,100)     161,933,800      19,686,114 


Net    incrase   over    six   years:    Nominal    capital,    55%;   Gross 
earnings,  92%. 


DENVER  &  RIO  GRANDE  287 

Character  of  Traffic. 

The  following  shows  the  percentage  of  tonnage  and  revenue 
from  various  classes  of  freight  for  the  year  ending  June  30th,  1906 : 

Tonnage  %.  Revenue  %. 

Agriculture    6.86  8.41 

Animals    5.68  5.85 

Mines    5.21  52.71 

Lumber    4.46  4.53 

Manufactures    12.31  10.44 

Miscellaneous   17.57  18.06 

The  largest  single  item  was  coal  and  coke,  which  made  up 
28%  of  the  total  tonnage.  Precious  ores  stood  next,  with  16%. 
The  traffic  is  therefore  highly  varied  and  not  dependent  on  any 
single  industry. 

Stability  of  Earnings. 

The  Denver's  mileage  has  increased  very  slightly  in  ten 
years,  while  the  gross  earnings  have  doubled. 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896-7 

1897-8 

2,212 
2,232 
2,254 
2,294 
2,330 
2,347 
2,378 
2,398 
2,420 
2,477 

$9,413,618         1      $4,256 
11,705,213                  5.244 

1898-9 

12,623,235 
14,756  683 
16,359,610 
17,036,828 
17,304,560 
16,446,435 
17,031,507 
19,686,114 

5,600 

1899-0 

6,433 

1900-1 

7,021 

1901-2 

1902-3 

7,259 

7,277 

1903-4 

6,859 

1904-5 

7,038 

1905-6 

7,498 

The  earnings  per  mile  increased  from  $4,256,  in  1896,  to 
$7,500  in  1906.  This  is  an  excellent  showing,  and  inasmuch  as 
the  increase  has  been  steady,  there  seems  to  be  no  reason  to  sup- 
pose that  with  the  development  of  Colorado's  resources  this  im- 
provement should  not  continue.  From  the  augmented  through 
traffic  which  should  come  with  the  completion  of  the  Western 
Pacific,  the  Denver  should  draw  still  further  profits. 

Maintenance. 

The  following  shows  the  mileage  appropriations  for  mainte- 
nance through  a  series  of  years: 


DENVER  &  RIO  GRANDE 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way            Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

Not  reported 
425,185 
416,424 
355,835 
368,653 
435,344 

$    928 
1,046 
964 
907 
825 
975 

$652                $1,580 
732                 1,778 
817                 1,781 
800                 1,707 
839                 1,664 

1,036                 2,011 

Average.  .  .  . 

400,288 

$940 

$812               $1,752 

Extra  main  track,  62  miles. 


Atch 

TJnion  Pac. 


577,005 
739,206 


2,236 
2,222 


These  figures  do  not  look  overly  liberal,  but  it  should  be 
recalled  that  one-third  of  the  total  mileage  is  narrow  gauge, 
which  can  be  maintained  much  more  cheaply  than  the  standard 
gauge.  Furthermore,  the  company  has  very  little  extra  main 
track.  The  maintenance  of  equipment  was  equivalent  to  $2,276 
per  locomotive,  $606  per  passenger  car,  and  $56  per  freight  car. 

Of  the  locomotives  in  use,  142  out  of  486  are  narrow  gauge; 
one-third  of  the  passenger  cars,  and  one-fourth  of  the  freight 
cars.  In  view  of  this  the  maintenance  was  probably  sufficient, 
without,  however,  concealing  large  amounts  of  profits. 

Improvements. 

Since  1901  the  sum  of  $120,000  annually  has  been  set  aside  from 
the  earnings  as  a  renewal  fund,  and  from  the  surplus  earnings  the 
following  amounts  have  been  devoted  to  betterments  and  new  equip- 
ment : 

1902-3 $417,517 

1904-5 283,915 

1905-6 1,150,000 

Total $1,851,432 

These  amounts  against  annual  maintenance  charges  of  four 
or  five  million  dollars  are  not  very  high. 

Surplus  Earnings. 
The  surplus  shown  over  charges  for  six  years  was  as  follows : 


DENVER  &  RIO  GRANDE 


289 


Year 

Surplus 

Dividends 

Paid  on 

Preferred 

Per  cent. 

Earned  on 

Common 

Average 

Price 

Pref.    Com. 

1900-1 

1901-2 

$2,053,422 
3,202,625 
2,962,561 
2,574,413 
2,932,452 
3,712,473 

5 
5 
5 
5 
5 
5 

2.3 

2.6 

2. 

0.7 

1.7 

3.3 

91 
92 
76 

77 
87 
88 

41 
44 

1902-3 

30 

1903-4 

27 

1904-5 

33 

1905-6 

44 

It  will  be  seen  that  nominally  the  company  has  for  some 
years  earned  a  small  percentage  on  its  common  stock. 

Dividend  Record. 

The  dividend  record  since  1887  is  as  follows : 

Preferred 

2/2 

2l/2  and  X]/^  scrip. 

2Va 

2/2 

2 

2 


Year. 

1887... 

1888... 

1890... 

1891... 

1893... 

1896-7  . 

1898... 

1899-00 

1901-6  . 


Common. 


2/2 
4 

5 


It  was  fifteen  years  after  the  reorganization  of  the  company 
before  it  was  able  to  pay  the  full  five  per  cent,  on  its  preferred 
stock,  but  this  has  been  paid  regularly  for  the  last  six  years.  On 
the  basis  of  the  exceptionally  prosperous  year  of  1905-6,  the 
margin  of  safety,  if  we  exclude  special  appropriations  for  better- 
ment, was  18%,  but  this  surplus  was  something  beyond  anything 
that  had  before  been  shown  by  the  road.  On  a  five  years  basis 
the  margin  of  safety  as  to  the  preferred  would  be  less  than  10% 
on  the  total  net  income. 

Present  Conditions. 

The  general  balance  sheet  as  of  June  30,  1906,  showed  as 
follows : 

Current   assets $9,767,419 

Current   liabilities 5,610,430 


Leaving  a  working  balance  of $4,156,989 


19 


290  DENVER  &  RIO  GRANDE 

The  credit  to  profit  and  loss,  including  renewal  fund,  was 
$3,642,930. 

Investment  Value. 

The  future  of  the  Denver  and  Rio  Grande  is  bound  up  on 
the  one  hand  in  the  prosperity  of  Colorado  and  Utah ;  on  the 
other  hand,  the  success  of  the  Western  Pacific. 

The  resources  of  Colorado  have  been  considerably  aug- 
mented by  introduction  of  scientific  methods  of  farming,  both 
through  irrigation  and  through  banking  the  top  soil.  The  state 
has  thoroughly  recovered  from  the  depression  due  to  the  decline 
of  the  silver  industry.  It  has  rich  coal  fields  which  are  developing 
rapidly,  and  from  its  varied  resources  it  is  probably  in  as  good 
a  position  to  stand  some  recession  from  recent  prosperity  as  any 
state  in  the  Union.  Should  the  rise  in  the  price  of  silver  con- 
tinue, this  would  mean  a  revival  in  silver  mining,  which  would 
still  further  contribute  to  its  solidity. 

The  state  of  Utah  is  settled  by  a  remarkably  frugal  and  indus- 
trious people  who  farm  by  means  of  irrigation,  which  forms  as 
solid  a  basis  for  agriculture  as  can  be  conceived.  The  mineral 
resources  of  Utah  are  immense,  and  show  a  steady  development. 

On  the  side  of  local  traffic,  therefore,  there  seems  every  rea- 
son to  believe  that  within  the  next  ten  years  the  traffic  of  the 
Denver  and  Rio  Grande  should  continue  to  show  a  steady  in- 
crease, perhaps  not  equal  to  that  of  the  last  ten  years,  but  cer- 
tainly sufficient  to  predict  a  prosperous  future  for  the  road. 

The  construction  of  the  Western  Pacific  was  virtually  forced 
by  the  change  in  ownership  of  the  Central  Pacific  line;  that  is 
to  say,  the  Southern  Pacific  Railroad.  When  the  latter  came 
under  the  control  of  the  Union  Pacific  it  was  easy  to  see  by  the 
aggressive  policy  of  the  Union  Pacific's  management,  that  the 
Denver  and  Rio  Grande  would  be  in  a  less  favorable  position  as 
regards  through  traffic  than  formerly. 

By  undertaking  a  contingent  liability,  the  Denver  and  Rio 
Grande  and  the  Rio  Grande  Western  together  receive  two- 
thirds  of  the  capital  stock  of  the  new  Pacific  line,  and  if  the  latter 
turns  out  to  be  as  feasible  a  project  as  it  now  seems,  this  should, 
in  the  course  of  time,  become  a  source  of  considerable  revenue, 
both  directly  and  indirectly  to  the  Denver  road. 

In  view'  of  all  this,  should  the  excellent  management  of  the 
Denver  continue,  its  stock  would  seem  to  present  as  favorable 
an  investment,  for  a  long  pull,  as  perhaps  any  on  the  market. 


DENVER  &  RIO  GRANDE  291 

The  preferred  stock  of  the  Denver  is  limited  to  five  per  cent, 
and  is  non-cumulative.  Unless  a  very  drastic  setback  should 
come,  the  full  dividends  on  this  stock  seem  fairly  well  assured, 
though  a  glance  at  the  table  of  surplus  earnings  will  show  that  it 
is  not  without  risk.  The  prices  at  which  it  has  ruled  obviously 
take  this  risk  into  consideration.  A  solid  5%  stock,  with  4%, 
money,  should  sell  between  par  and  125.  Denver  preferred,  in 
the  last  four  years,  has  ruled  between  62  and  103.  It  sold  up  to 
the  latter  figure  in  the  very  prosperous  year  of  1901-2,  and  it 
sold  off  to  62  in  the  general  slump  of  1904,  rising  again  to  91  in 
1905.  In  the  general  decline  of  1907  it  sold  down  to  70.  At 
anything  like  the  latter  figure  it  would  seem  to  present  an  at- 
tractive purchase,  though  it  is  obvious  that  it  might  sell  lower. 
Very  many  investors  do  not  like  to  touch  a  stock  where  new 
construction  is  under  prospect,  and  the  building  of  the  Western 
Pacific  is  to  all  intents  and  purposes  a  new  division  of  the  Den- 
ver and  Rio  Grande. 

The  price  of  the  common  stock  has  fluctuated  very  widely. 
It  was  run  up  to  53  in  1901,  and  to  52  in  1902.  It  slumped  to  18  in 
the  general  decline  of  1903-4,  rising  again  to  51  in  1906.  It  sold 
below  25  in  the  general  decline  of  1907.  At  somewhere  around 
the  low  point  of  1907,  that  is,  somewhere  below  25,  it  would 
certainly  seem  to  offer  inducements  to  the  investor  who 
would  put  his  stock  by  and  hold  it  for  a  number  of  years.  Bought 
at  something  like  these  low  prices,  it  could  probably  be  sold  at 
a  handsome  profit  when  it  rose  again,  to  be  repurchased  lower 
down  if  the  high  prices  did  not  hold.  By  watching  the  earnings 
of  the  road,  the  investor  would  be  able  to  determine  whether  a 
very  considerable  rise  in  the  price  was  justified,  and  again 
whether  the  stock  seemed  worth  purchasing  at  lower  levels. 

A  brief  discussion  of  the   Western    Pacific   project  will   be 
found  under  that  heading. 


DETROIT,  TOLEDO  AND  IRONTON— ANN 
ARBOR  SYSTEM. 

This  new  system  was  formed  by  the  purchase  in  June  of  1905 
by  the  Detroit,  Toledo  and  Ironton,  of  about  three-quarters  of  the 
stock  in  the  Ann  Arbor  Railroad,  placing  the  two  roads  under  a 
single  management.  The  D.  T.  I.  is  a  reorganization  of  the  De- 
troit Southern  and  operates  a  line  from  Detroit,  via  Lima,  O., 
to  Ironton  on  the  Ohio  River,  and  its  main  business  is  the  haul- 
age of  soft  coal.  The  Ann  Arbor  extends  from  Toledo  north- 
westerly to  Frankfort  on  Lake  Michigan,  with  a  line  of  ferries  to 
various  points  in  northern  Wisconsin  and  northern  Michigan. 

The  combined  roads  have  a  total  mileage  of  727  miles,  and 
showed  gross  earnings  in  1906  of  $4,090,208,  or  an  average  of 
$5,488  per  mile. 

The  Detroit  Southern  passed  into  a  receiver's  hands  in 
1904,  and  was  reorganized  in  May  of  1905.  In  June  of  1905  it 
issued  $5,500,000  of  collateral  trust  notes  in  purchase  of  $3,- 
010,000  par  value  out  of  a  total  of  $4,000,000  preferred  stock  of 
the  Ann  Arbor,  and  $2,190,000  par  value  out  of  a  total  of  $3,250,000 
of  Ann  Arbor  common.  The  Ann  Arbor  had  up  to  that  time 
been  dominated  by  Gould  interests  and  its  president — Joseph 
Ramsay — was  also  president  of  the  Wabash. 

Ann  Arbor  preferred,  in  the. first  half  of  1905,  sold  in  the 
market  at  from  $66  to  $79  per  share,  and  the  common  at  from  $34 
to  ^37  per  share.  Taking  the  higher  figures  in  each  case,  this 
would  give  a  total  valuation  for  the  purchase  of  the  D.  T.  I.  of 
sbout  $3,000,000,  which  stands  against  $5,099,000,  the  valuation 
at  which  this  stock  is  carried  on  the  books  of  the  Ironton  road. 
This,  apparently,  represented  a  very  comfortable  price,  or  mar- 
gin of  profit,  for  some  one. 

The  D.  T.  I.  is  building  a  bridge  across  the  Ohio  River  at 
Ironton,  and  it  was  announced  that  the  same  interests  in  control 
of  the  Ironton  are  building  an  independent  line  from  Ashland,  Ky., 
to  Pound  Gap  in  the  same  state,  a  distance  of  125  miles,  affording 

(292) 


DETROIT,  TOLEDO  &  IRONTON  293 

connection  with  350,000  acres  of  coal  lands  owned  by  these  par- 
ties. This  would  give  the  owners  of  the  latter  a  very  direct  route 
from  their  Kentucky  coalfields  to  Lake  Erie,  and  the  construction 
of  this  line  would  very  materially  enhance  the  traffic  of  the 
Ironton  road. 

Ownership. 

The  interests  in  control  of  the  new  system  are  much  the 
same  as  those  who  had  control  of  the  Cincinnati,  Hamilton 
and  Dayton,  and  who  engineered  the  merger  of  the  latter,  the 
Pere  Marquette  and  the  Chicago,  Cincinnati  and  Louisville, 
shortly  before  the  first  two  of  these  roads  passed  into  the  re- 
ceiver's hands.  The  directorate  includes  Eugene  Zimmerman, 
president  of  the  Cincinnati,  Hamilton  and  Dayton  up  to  the  sale 
of  the  control  of  that  road  to  the  Morgan  interests  in  1905 ; 
George  M.  dimming,  president  of  the  United  States  Mortgage 
and  Trust  Company  and  chairman  of  the  board  of  directors  of  the 
Wisconsin  Central  under  its  new  regime,  formerly  a  director  in 
the  C.  H.  &  D. ;  Joseph  S.  Auerbach,  director  in  various  banking 
companies  in  New  York ;  F.  J.  Lisman,  of  F.  J.  Lisman  &  Com- 
pany, bankers,  New  York,  and  vice-president  of  the  defunct  De- 
troit Southern ;  T.  D.  Rhodes,  New  York ;  J.  H.  Scoville,  a 
director  in  the  Interborough  of  New  York  City ;  Benjamin  S. 
Warren,  Detroit ;  Bernard  J.  Burke,  vice-president,  New  York ; 
Frank  A.  Durban,  second  vice-president,  Zanesville,  Ohio. 

The  Ann  Arbor  board  includes  Messrs.  Zimmerman,  Cum- 
ming,  Burke,  Durban,  Scoville  and  Warren  of  the  D.  T.  I.  board; 
Rudolph  Kleybolte,  formerly  director  in  the  Cincinnati,  Hamil- 
ton and  Dayton  under  the  Zimmerman  management;  H.  B.  Hol- 
lins,  Jr.,  J.  E.  Watson,  and  James  E.  Tolfree,  New  York ;  and  M. 
L.  Sternberger,  Wallston,  Ohio. 

Capitalization. 

In  1906,  including  two  months  of  the  operation  of  the  re- 
organized company,  and  ten  months  of  the  old  Detroit  Southern 
in  the  hands  of  the  receivers,  the  D.  T.  I.  on  gross  earnings  of 
$1,468,000,  showed  net  earnings  of  $153,695.  This  was  insuf- 
ficient by  $286,000  to  meet  the  interest  payment  on  the  road. 
This  road,  earning  only  $3,367  per  mile,  and  showing  a  deficit, 
was  provided  with  a  modest  capitalization  of  $25,000,000  of  stock, 
not  new  capital  but  simply  stock  issuable  for  old  securities.     In 


,'94  DETROIT,  TOLEDO  &  IRONTON 

Ihe  purchase  of  the  Ann  Arbor  it  issued  $5,500,000  of  collateral 
trust  notes  already  noted  and  pledged  further  as  security  on 
these  notes,  $5,000,000  of  its  collateral  trust  bonds.  These  issues, 
with  some  $2,000,000  of  equipment  trust  notes,  brought  the  total 
indebtedness  of  the  road  to  $24,926,465,  at  the  close  of  the  fiscal 
year  of  1906. 

Adding  in  the  bonds,  and  the  outstanding  stock  of  the  Ann 
Arbor  not  held  by  the  D.  T.  I.,  the  capital  account  of  the  system 
on  June  30th,  1906,  stood  as  follows : 

Common    stock $12,500,000 

Preferred  stock,   1st 7,500,000 

Preferred  stock,  2d 5,000,000 

Total  stock $25,000,000 

Funded  debt  D.  T.  1 24,926,465 

Ann  Arbor  bonds 7,000,000 

Stock   outstanding,    common 1,060,000 

Stock  outstanding,  preferred 990,000 

Total  capital $58,976,465 

Securities  held 10,932,603 

Approx.   net   capital $48,043,862 

Approx.  net  capit.  per  mile $66,084 

Average   miles   operated 727 

Net  earnings  on  net  capitalization 2.8% 

Stock  on  net  capitalization 45% 

Fixed  Charges  on  Total  Net  Income.  .  .  87% 

Factor  of  Safety 13% 

In  the  securities  owned  are  included  $5,000,000  D.  T.  I.  bonds 
pledged  as  security  for  the  collateral  trust  notes  and  $750,000  of 
the  same  bonds  held  in  the  treasury.  The  Ann  Arbor  stock  is 
taken  at  the  valuation  given  in  the  report,  $5,099,000,  which  is 
very  near  the  par  value  of  the  stock.  The  Ann  Arbor  company 
showed  a  surplus  in  1906  sufficient  to  pay  the  full  5%  on  the 
$4,000,000  of  preferred  stock,  and  show  nearly  7%  on  the  com- 
mon. 

It  will  be  seen  that  the  approximate  net  capitalization  of 
the  road,  earning  in  1906,  $5,488  per  mile,  was  $66,084  per  mile. 


DETROIT,  TOLEDO  &  IRONTON 


295 


This  stands  against  an  estimated  net  capitalization  of  $78,000 
per  mile  on  the  Lake  Shore,  with  gross  earnings  of  $25,395  per 
mile.  The  net  earnings  for  the  system  for  1906  showed  2.8% 
on  the  net  capitalization  as  against  13%  on  the  Lake  Shore. 
Eliminating  the  securities  issued  in  purchase  of  the  Ann  Arbor 
property,  the  D.  T.  I.  proper  showed  net  earnings  in  1906  of 
1.4%  on  its  net  capitalization. 

Including  the  outstanding  Ann  Arbor  stock,  the  total  stock 
of  the  system  represented  45%  of  the  estimated  net  capitalization, 
but  Fixed  Charges  consumed  87%  of  the  Total  Net  Income,  leav- 
ing but  a  very  small  Factor  of  Safety  for  the  underlying  securi- 
ties. Including  all  its  Ann  Arbor  Collateral  trust  notes,  the  D. 
T.  I.  showed  a  deficit  of  $270,000,  which  is  about  equivalent  to 
the  interest  charges  on  these  notes.  Excluding  these  latter 
the  road  barely  earned  its  Fixed  Charges  on  its  own  securities 
in  1906. 

Traffic  and  Earnings. 

On  the  Ann  Arbor  road  the  passenger  business  makes  up 
about  the  usual  percentage  of  the  gross  earnings ;  that  is  to 
say,  a  little  less  than  25%.  Of  its  freight  tonnage,  the  largest 
single  item  is  bituminous  coal,  23%,  and  lumber  and  logs,  27%. 
The  balance  of  its  traffic  is  broadly  distributed.  On  the  other 
hand  the  D.  T.  I.  is  almost  exclusively  a  freight  road,  passenger 
earnings  making  up  less  than  10%  of  the  gross.  In  turn,  of  the 
freight  traffic,  59%  is  products  of  mines,  of  which  the  chief  item 
is  bituminous  coal,  40%.  These  facts  should  be  recalled  in  con- 
sidering the  maintenance  charges  on  the  two  parts  of  the  system. 

The  mileage  and  gross  earnings  of  the  two  roads  for  five 
years  compare  as  follows : 


Year 

Det.  Sth. 
Mileage 

Gross 
Earnings 

Ann  Arbor 
Mileage 

Gross 
Earnings 

Total 

Total 

1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

381 
381 
438 
436 
436 

$1,239,906 
1,444,900 
1,488,938 
1,468,299 
1,914,977 

292 
292 
292 
292 
292 

$1,893,410 
2,037,215 
1,979,047 
1,922,593 
2,175,231 

673 
673 
730 

728 
728 

$3,133,316 
3,482,115 
3,467,985 
3,390,892 
4,090,208 

It  will  be  seen  that  the  gross  earnings  of  the  combined 
roads  were  about  stationary  through  the  four  years  preceding  the 
consolidation  under  a  single  management. 


296 


DETROIT,  TOLEDO  &  IRONTON 


The  increase  in  1906  was  due  to  the  very  general  increase 
in  tonnage  distributed  over  both  systems.  The  total  tonnage 
of  the  Ann  Arbor  increased  from  1,373,000  tons  to  1,775,000  tons, 
while  the  tonnage  of  the  D.  T.  I.  increased  from  1,783,000  tons 
to  2,249,000.  This  very  heavy  increase  in  traffic  was  obtained 
at  a  considerable  reduction  in  the  average  rate  received,  the  rate 
on  the  Ann  Arbor  declining  from  .67c.  in  1905  to  .56c;  and  on 
the  D.  T.  I.  from  .50c.  to  .45c.  The  result  was  a  very  heavy 
increase  in  the  traffic  density,  without  a  corresponding  increase 
in  the  gross  earnings.  There  was  at  the  same  time  a  very  heavy 
cut  in  the  ratio  of  operating  expenses  which  took  78%  of  the 
gross  of  the  combined  roads  in  1905,  and  only  67%  in  1906.  The 
report  of  the  D.  T.  I.  states  "the  road  has  benefited  during  the 
past  year  by  the  reduction  of  grades  and  the  use  of  heavier 
engines.  In  1906  we  handled  391  tons  of  freight  per  train  com- 
pared with  283  tons  in  1905,  an  increase  of  38%." 

It  was  by  this  means  that,  with  a  considerable  reduction  in 
the  average  rates  received,  the  ratio  of  the  cost  of  conducting 
transportation  to  gross  earnings  remained  about  the  same.  It 
was  37%  in  1905  and  38%  in  1906,  on  the  D.  T.  I.  and  33%  and 
35%  respectively  on  the  Ann  Arbor. 

Maintenance. 

It  follows  from  the  showing  above  that  the  heavy  reduction 
of  the  operating  ratio  was  accomplished  not  through  a  lowered 
percentage  of  the  cost  of  conducting  transportation,  but  through 
a  lessened  share  of  the  gross  earnings  devoted  to  maintenance. 
The  following  table  shows  the  maintenance  charges  on  the  D.  T.  I. 
for  a  period  of  several  years : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

487,252 
534,712 
490,805 
518,578 
756,277 

557,524 

$493 
537 
534 
725 
627 

$558 
607 
743 
724 
693 

$1,051 
1,144 
1,277 
1,449 
1,320 

Average 

$583 

$665 

$1,248 

DETROIT,  TOLEDO  &  IRONTON 


297 


Traffic  Density 

Maintenance  per  Mile 
Way             Equipment 

Total 

Wabash 

Lake  E.  &  W. .  . 
Vandalia 

880,032 
592,307 
910,426 

$1,332 

999 

1,184 

$1,370 

733 

1,683 

$2,702 
1,732 

2,877 

(Av.  1905-6) 

First  as  to  the  D.  T.  I.,  it  will  be  seen  that  the  traffic  density 
rose  in  1906  very  nearly  50%  over  the  previous  year,  while  the 
amount  of  the  total  maintenance  of  way  declined  $102  per  mile. 
There  was  likewise  a  lessened  appropriation  for  maintenance 
of  equipment.  Comparing"  the  road  with  two  or  three  of  its 
neighbors,  it  will  be  seen,  for  example,  that  the  Lake  Erie  and 
Western,  a  Vanderbilt  road,  with  about  the  same  traffic  density, 
spent  in  1905  on  the  average  $500  per  mile  more  in  maintenance 
than  the  D.  T.  &  I.  for  1906.  This  was  also  the  actual  difference 
in  the  total  expenditures  for  maintenance  in  1906  between  the 
two  roads ;  while  the  traffic  density  of  the  Lake  Erie  and  Western 
was  considerably  lower  than  the  D.  T.  I. 

The  maintenance  items  of  the  Ann  Arbor  for  a  series  of 
years  have  been  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

654,966 
685,838 
700,619 
624,333 
661,934 
944,505 

712,032 

$1,194 
1,408 
1,288 
1,106 
1,056 
1,029 

$1,180 

$1,043 
918 
996 

1,092 
959 

1,028 

$1,006 

$2,237 
2,326 
2,284 
2,198 
2,015 
2,057 

Average 

$2,186 

It  will  be  seen  that  likewise  on  the  Ann  Arbor,  with  an 
increase  of  traffic  density  in  1906  nearly  50%  over  the  previous 
year,  there  was  actually  a  less  expenditure  in  maintenance  of 
way  but  a  slightly  increased  expenditure  for  equipment,  so  that 
the  total  expenditures  for  maintenance  for  the  year  were  practi- 
cally the  same  with  half  again  as  much  freight  traffic  and  an 
increase  of  a  quarter  of  a  million  dollars  in  gross  earnings. 


298  DETROIT,  TOLEDO  &  IRONTON 

Surplus  Earnings. 

Despite  a  considerable  increase  in  taxes,  the  Ann  Arbor 
showed  an  increase  in  surplus  of  from  $266,298  in  1905  to 
$430,704  in  1906.  The  surplus  shown  in  1906  was  the  highest 
in  recent  years,  so  that  the  increase  for  1906  seemed  very  decided 
improvement.  But  as  already  noted,  this  result  was  reached 
principally  by  a  decreased  percentage  in  the  appropriations  for 
maintenance. 

Net  earnings  on  the  D.  T.  I.  increased  from  $153,000  in  1905 
to  $559,000  in  1906.  In  1905  appropriations  for  maintenance 
consumed  42%  of  the  gross  earnings;  in  1906  they  consumed 
31%,  or  a  reduction  of  about  one  fourth. 

As  already  noticed,  the  cost  of  conducting  transportation  in- 
creased slightly.  In  the  same  year,  interest  and  taxes  increased 
nearly  $400,000,  in  which  the  principal  item  was  $275,000  interest 
on  the  collateral  trust  notes,  against  which  the  road  received  no 
direct  income.  As  a  result  of  this  increase  in  charges  the 
deficit  for  the  year  remained  about  the  same  as  that  of  the  pre- 
vious year,  that  is  to  say,  $279,941.  Had  the  Ann  Arbor  paid 
5%  on  its  preferred  stock,  as  it  was  amply  able  to  do,  the  D.  T. 
I.  would  have  received  from  this  source  $155,000,  and  there  would 
have  still  remained  a  divisible  surplus,  equivalent  to  7%.  Had 
the  entire  amount  of  this  divisible  surplus  been  distributed,  the 
share  of  the  D.  T.  I.  would  have  been  another  $155,000,  so 
that  the  combined  amounts  would  have  paid  the  interest  charges 
and  left  something  over. 

The  Ann  Arbor  road  had  an  actual  cash  balance  of  current 
assets  over  current  liabilities  at  the  close  of  the  year  considerably 
exceeding  its  earnings  for  the  year,  so  that  the  system  did  not 
have  to  borrow  money  outside  to  meet  the  nominal  deficit. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906  the  Ann  Arbor  road 
showed : 

Current  assets $1,129,580 

Current  liabilities    427,857 

Leaving  a  working  balance  of $701,723 

There  were  items  of  cash  in  the  treasury  of  $43,280,  and  cash 
in  other  depositaries,  $828,021.  The  credit  to  Profit  and  Loss 
was,  $1,258,671. 


DETROIT,  TOLEDO  &  IRONTON  299 

During  the  year  the  Ann  Arbor  road  paid  in  back  taxes  to 
the  state  of  Michigan,  $339,392,  charged  to  Profit  and  Loss.  This 
amount  was  due  under  the  new  Michigan  tax  law,  the  legality 
of  which  had  been  contested  by  the  railroads  of  that  state  but 
finally  decided  in  the  state's  favor.  The  net  increase  of  the  Profit 
and  Loss  credit  for  the  year  was  therefore  only  $91,000. 

The  balance  sheet  of  the  D.  T.  I.  showed 

Current  assets  $521,700 

Current  liabilities  496,347 

Leaving  a  working  balance  of $25,353 

There  were  items  of  cash  in  the  treasury  of  $49,025,  and 
cash  in  other  depositaries  of  $156,373. 

The  debit  to  Profit  and  Loss  at  the  close  of  the  year  was 
$305,380,  an  increase  of  $270,941  for  the  year. 

Investment  Value. 

There  is  outstanding  about  $1,000,000  of  Ann  Arbor  pre- 
ferred, and  somewhat  more  than  this  amount  of  the  common 
stock.  If  the  D.  T.  I.  remains  solvent,  the  possessors  of  this 
stock  should  be  in  a  very  comfortable  position,  for  the  D.  T.  I. 
has  paid  for  70%  of  this  Ann  Arbor  stock  a  sum  practically 
amounting  to  par  for  both  the  common  and  the  preferred,  and 
against  this  purchase  has  issued  notes  bearing  a  high  rate  of 
interest.  The  only  way  that  it  can  get  even  is  to  declare  divi- 
dends equal  to  the  full  5%  on  the  preferred  and  at  least  5%  on 
the  common,  and,  as  we  have  seen,  the  Ann  Arbor  nominally 
earned  such  dividends  in  1906.  The  alternative  to  this  would 
be.  for  the  D.  T.  I.  to  borrow  the  amount  of  its  deficit  from  the 
Ann  Arbor. 

The  very  interesting  question  then  is  whether  the  combined 
roads  will  be  able  to  keep  up  the  very  handsome  increase  of 
business  shown  in  1906,  and  somewhat  improve  this.  If  this 
could  be  done,  Ann  Arbor  stock  would  be  an  excellent  thing  to 
have  and  to  hold ;  or  it  would  be,  save  for  the  fact  that  minority 
shareholders  have  not  in  general  been  fortunate  in  the  vicissitudes 
of  changing  systems. 

The  $25,000,000  of  outstanding  capital  stock  of  the  D.  T.  I. 
was  issued  as  follows:  $1,000,000  of  the  first  preferred,  and 
$800,000  of  the  second  preferred  to  the  underwriting  syndicate 


300  DETROIT,  TOLEDO  &  IRONTON 

which  furnished  cash  for  the  reorganization  of  the  road,  in 
addition  to  the  bonds  they  received ;  $6,500,000  of  the  first  pre- 
ferred stock  to  the  preferred  stockholders  of  the  Detroit  Southern 
who  paid  an  assessment  of  $10  per  share  in  cash  ;  $4,200,000  of  the 
second  preferred  to  common  stockholders  of  the  Detroit  South- 
ern paying  an  assessment  of  $5  per  share  in  cash.  The 
entire  amount  of  the  common  stock  went  to  the  reorganization 
managers  "for  furnishing  the  cash  and  for  other  considerations." 
Apparently  therefore,  the  subscribers  of  $2,675,000  of  the  con- 
solidated mortgage  bonds  received  a  bonus  of  $1,000,000  of  the 
first  preferred,  $800,000  of  the  second  preferred,  and  $12,500,000 
of  the  common  stock,  or  a  total  of  nearly  $17,000,000  face  value 
of  securities  for  a  presumptive  outlay  of  $2,675,000. 

The  value  of  this  stock,  present  or  prospective,  the  in- 
dividual investor  will  best  be  able  to  decide  for  himself.  With 
fixed  charges  in  the  highly  prosperous  year  of  1906  consuming 
about  87%  of  the  total  net  income,  it  would  seem  that  were  a 
business  reaction  to  come  this  consolidation  would  hardly  fare 
better  than  the  C.  H.  &  D.-Pere  Marquette  merger,  under  the 
same  auspices  and  with  the  same  generous  issue  of  securities. 

Should  the  extension  into  the  Kentucky  coalfields  be  com  • 
pleted,  this  would  undoubtedly  add  very  heavily  to  the  traffic  of 
the  road,  but  it  is  understood  that  this  extension  is  to  be  built 
independently,  and  if  it  were  afterwards  added  to  the  system  on 
the  same  basis  as  the  reorganization  of  the  Detroit  Southern  or 
the  purchase  price  of  the  Ann  Arbor  stock,  it  is  obvious  that  the 
system  would  pay  well  for  what  it  gained. 


DULUTH,  SOUTH  SHORE  AND  ATLANTIC 

RAILWAY. 

The  Duluth,  South  Shore  &  Atlantic  is  a  subsidiary  line  of  the 
Canadian  Pacific,  operating  from  Duluth  to  Sault  Ste.  Marie, 
through  northern  and  peninsular  Michigan,  with  branches  into 
the  Calumet  mineral  district.  It  is  largely  an  ore  road;  its 
traffic  is  not  heavy,  and  its  capitalization  enormous.  To  judge 
from  the  reports,  it  is  kept  alive  largely  by  the  bounty  of  the 
parent  road. 

The  road  represents  the  consolidation,  in  1886,  of  several 
small  lines,  and  in  1887,  the  Marquette,  Houghton  and  Onton- 
agon and  the  Marquette  and  Western  were  leased  and  later  pur- 
chased outright. 

Ownership. 

The  majority  of  both  common  and  preferred  is  owned  b>' 
the  Canadian  Pacific  Railway.  In  addition  to  this,  the  Canadian 
and  Pacific  held  in  its  treasury  the  entire  amount  of  the  4% 
consolidated  mortgage  bonds,  $15,107,000,  and  of  $3,000,000  In- 
come Certificates ;  advanced  $236,000  on  car  trusts,  and  had  other 
guaranteed  interest  advances  to  the  amount  of  $3,589,395,  to 
say  nothing  of  an  open  account  of  $323,000  additional. 

The  holdings  of  stocks  and  bonds  and  advances  by  the 
Canadian  Pacific  nominally  represent,  therefore,  a  total  of  $33,- 
456,000.  This  is  equivalent  to  $56,000  per  mile  of  road,  and  is  a 
great  deal  more  than  the  road  is  worth.  And  the  company  has 
$15,500,000  of  other  stocks  and  securities  outstanding. 

The  item  of  $3,589,395  of  guaranteed  interest  advances  does 
not,  it  is  to  be  noted,  appear  as  a  separate  item  in  the  report  of 
the  Canadian  Pacific  Railway. 

The  directorate  is  controlled  by  representatives  of  the  Canadian 
Pacific. 

(301) 


302     DULUTH,  SOUTH  SHORE  &  ATLANTIC 

Capitalization. 

The  capital  account  on  June  30th,  1906,  showed  as  follows: 

Common  stock $12,000,000 

Preferred   stock 10,000,000 

Income  Certificates 3,000,000 

Total  stock $25,000,000 

Funded   debt 20,000,000 

Car   trusts .- 406,493 

Can.  Pac.  Guar.  Int.  advances 3,589,395 

Total  debt $23,995,888 

Total    capital $48,995,888 

Approx.  capitalization  per  mile $82,620 

Average  miles  operated 593 

Net  earnings  on  total  capitalization...  2% 

Stock  on  net  capitalization 51% 

Fixed  Charges  on  Total  Net  Income. .  .  115% 

Factor  of    Safety — 

A  capitalization  of  $82,620  per  mile  of  road  with  a  traffic 
density  of  382,800  tons,  and  gross  earnings  of  only  $5,159  per 
mile  is  not  a  very  favorable  showing.  It  compares  with  a  gross 
capitalization  of  $42,800  per  mile  of  the  companion  Sault  Ste. 
Marie,  with  earnings  of  $5,728  per  mile. 

The  net  earnings  show  only  2%  on  the  total  capitalization, 
which  is  only  about  one-third  the  general  average  for  the  country. 
In  other  words,  the  capitalization  is  about  three  times  too  high. 
Morever,  this  capitalization  is  not  largely  in  the  form  of 
stock,  which  earns  nothing  and  draws  nothing;  excluding  the 
$3,000,000  of  income  bonds,  very  near  one-half  of  it  is  indebted- 
ness drawing  interest. 

Even  excluding  the  income  bonds,  the  indebtedness  of  the 
road  alone  amounts  to  over  $40,000  per  mile,  and  after  taxes  have 
been  deducted  from  the  total  net  income,  the  surplus  earnings 
of  the  road  did  not  amount  in  1906,  to  more  than  3%  on  the 
interest  paying  indebtedness. 

It  is  not  surprising,  therefore,  to  find  the  road  steadily 
"earning  a  deficit,"  year  after  year.  It  amounted  to  $150,302  in 
1906. 


DULUTH,  SOUTH  SHORE  &  ATLANTIC  303 

This  was  in  the  face  of  no  very  heavy  maintenance  charges, 
which  in  1906  amounted  to  only  $702  per  mile  for  the  mainten- 
ance of  way,  and  $379  per  mile  for  equipment.  Nearly  half  of 
the  traffic  of  the  road  is  ore  traffic,  and  the  maintenance  of  this 
is  naturally  low.  In  no  other  way  could  such  maintenance 
charges  be  regarded  as  adequate. 

The  gross  earnings  for  1906  for  the  first  time  were  over 
$3,000,000.  They  have  fluctuated  between  that  and  $2,500,000 
for  a  number  of  years. 

Yet  with  but  very  slightly  increased  maintenance  charges, 
amounting  to  a  total  of  only  $78,000  for  the  year,  the  road  was 
still  unable  to  earn  its  interest  obligations.  In  consequence, 
there  was  a  further  debit  to  profit  and  loss,  and  this  item  on 
the  balance  sheet  at  the  close  of  the  year,  amounted  to  $2,616,756. 

It  does  not  appear  that  there  were  any  unusual  charges, 
although  "construction,"  charged  to  operating  expenses,  amounted 
to  $341,309. 

The  balance  sheet  at  the  close  of  the  year  showed  a  debit 
balance  of  about  $1,000,000,  offset  by  a  nearly  equal  amount  of 
advances  to  other  companies.  The  amount  of  cash  in  the  treasury 
was  $43,000. 

It  is  scarcely  worth  while  to  discuss  the  investment  value 
of  the  Duluth  South  Shore  stock.  Its  gross  earnings  have  nor 
been  rising  steadily  as  other  American  roads'  have  been  doing; 
the  earnings  per  mile  were  rather  smaller  in  the  years  of  1904 
and  1905  than  in  the  year  of  1903.  There  is  little  therefore  to 
indicate  that  a  steady  increment  of  earnings  will  soon  bring 
the  road  into  better  shape. 

Before  anything  can  be  paid  upon  the  income  certificates, 
the  net  earnings  of  the  road  will  have  to  increase  by  $150,000 
to  $200,000,  even  if  maintenance  is  kept  down  to  its  present 
apparently  rather  low  figure ;  and  in  turn,  the  4%  on  the  $3,000,- 
000  of  income  certificates  would  require  an  additional  $120,000 
before  any  surplus  for  stock  could  be  shown. 

The  company  is  apparently  in  need  of  working  capital, 
which  it  secures  by  further  borrowings  from  the  parent  road, 
and  its  interest  obligations  are  steadily  increasing  rather  than 
decreasing. 

If  this  is  the  showing  for  a  year  of  such  unparalleled  pros- 
perity as  1906  it  is  not  very  difficult  to  see  what  would  become 
of  the  road  in  less  prosperous  times.     The  road  would  scarcely 


304     DULUTH,  SOUTH  SHORE  &  ATLANTIC 

sell  on  a  better  basis  than  a  valuation  showing  4%  of  net  earnings 
over  taxes.  Supposing  maintenance  adequate,  this,  on  the  earn- 
ings of  1904-5  and  1905-6,  would  give  a  cash  valuation  for  the  prop- 
erty of  rather  under  $18,000,000.  Were  the  Canadian  Pacific 
to  pay  the  outstanding  obligations,  its  $33,456,000  of  stock,  bonds 
and  debt  would,  on  this  basis,  show  a  cash  valuation  of  not  more 
than  $13,000,000. 

Apparently,  therefore,  the  Canadian  Pacific  could  gain  little 
by  foreclosure.  On  the  other  hand,  it  is  too  heavily  committed 
to  the  fortunes  of  the  road  to  let  it  go.  One  may  infer,  therefore, 
that  it  will  continue  to  put  up  the  deficit  in  the  hope  that 
eventually,  possibly  through  extensions,  the  road  can  be  put  on 
a  paying  basis. 

Meanwhile  it  is  difficult  to  see  what  possible  value  the 
shares  of  the  road  can  have.  Since  absolute  control  is  held  by 
the  Canadian  Pacific,  the  floating  supply  is  worth  nothing  to 
any  other  road. 

In  order  to  earn  even  one  per  cent,  on  the  preferred  stock, 
the  earnings  over  taxes, — the  surplus  before  interest, — would 
have  to  be  increased  nearly  50%,  even  supposing  present  rates 
and  present  maintenance  are  unchanged,  and  saying  nothing  of 
the  need  of  current  funds. 

Yet  how  this  is  to  be  achieved  in  the  face  of  steadily  de- 
clining freight  rates,  it  is  not  easy  to  see.  The  rate  for  1893 
was  1.05c,  for  1905,  .93c,  and  for  1906,  .85c;  and  even 
these  latter  figures  are  high  compared  with  the  general  average 
of  American  tariffs. 

It  is  to  be  noted,  morever,  that  the  present  showing  of  a 
deficit  is  not  a  steadily  decreasing  factor,  growing  less  through 
a  series  of  years.  In  1902  the  road  was  able  to  show  a  small 
surplus,  with  about  the  same  average  of  maintenance  charges. 
In  the  four  succeeding  years  the  deficit  has  ranged  from  $30,000 
in  1903  to  $283,000  in  1904,  with  little  change  in  maintenance 
charges. 

In  five  years  the  price  of  preferred  stock  has  ranged  from 
$10  to  $45  per  share.  The  price  of  the  common  stock  in  the  same 
period  has  ranged  between  $4  and  $22.  The  high  price  was  for 
1906,  and  based  upon  the  situation  shown  in  the  above  analysis. 

It  is  difficult  to  believe  that  any  serious  minded  investor 
purchased  stock  at  the  levels  of  1906.  The  preferred  at  around 
$10  or  $15  per  share,  the  common  stock  at  half  these,  might  show 


DULUTH,  SOUTH  SHORE  &  ATLANTIC  305 

?  speculative  buyer  a  handsome  profit,  through  the  fluctuations 
in  value;  but  those  seeking  solid  investments  will  probably  con- 
clude that  the  market  has  many  more  attractive  purchases. 


?o 


ERIE  RAILROAD. 

More  than  any  other  American  line,  the  Erie  is  a  railroad 
with  a  history ;  and  even  in  a  country  where  scandals  and  mis- 
management were  not  infrequent,  the  story  of  the  Erie  stands 
out  in  bold  relief.  Its  annals  go  back  to  the  halcyon  days  when 
Daniel  Drew  ran  printing  presses  overtime  to  manufacture  stock 
for  Commodore  Vanderbilt  to  buy;  when  Jay  Gould  restored  to 
the  road  the  modest  sum  of  ten  millions,  because,  so  the  chronicle 
runs,  "he  feared  to  shared  the  fate  of  his  partner,  'Jim'  Fisk, 
who  was  murdered ;"  when  the  offices  of  the  company  were 
carried  about  in  the  pockets  of  Fisk,  Gould,  et  al.,  to  escape 
suits  and  injunctions;  and  the  road  was  in  general  simply  an 
extensive  gold  brick  which  its  possessors  used  in  the  promotion 
of  their  highly  ingenious  and  often  amusing  swindles. 

All  this  belongs  to  an  ancient  day  and  since  its  reorganization 
at  the  close  of  1895,  the  Erie  has  been  admirably  conducted; 
large  sums  have  been  spent  in  improvements ;  its  earnings  have 
slowly  but  steadily  increased ;  and  while  it  is  loaded  with  a 
rather  heavy  burden  of  overcapitalization,  its  securities  have 
acquired  in  recent  years  a  much  greater  degree  of  stability  than 
they  ever  before  possessed. 

The  Erie  operates  its  own  lines  from  New  York  to  Chicago, 
the  average  mileage  amounting  to  2,151  miles,  of  which  more 
than  one-third  has  second  or  double  track.  It  has  valuable 
coal  properties,  which  have  helped  towards  the  stability  and  the 
increase  of  its  traffic ;  and  its  gross  earnings  in  1906  exceeded  fifty 
millions  of  dollars.  Its  earnings  per  mile  and  its  freight  den- 
sity exceed  that  of  the  New  York  Central,  a  very  notable  fact. 

History. 

The  New  York  and  Erie  was  chartered  as  far  back  as  1832 
to  construct  a  direct  line  from  tidewater  to  Lake  Erie,  to  avoid 
the  circuitous  route  of  the  Hudson  and  central  New  York.  Con- 
struction   began    in    1836   but    its   variegated    financial    troubles 

(306) 


ERIE  307 

began  almost  at  the  same  time  and  the  through  line  to  Lake  Erie 
was  not  opened  until  1851.  It  was  originally  projected  to  run 
from  Piedmont,  about  twenty  miles  above  New  York  on  the  west 
bank  of  the  Hudson,  where  a  new  metropolis  was  to  be  built 
outright.  The  remains  of  the  long  piers,  stretching  out  into  the 
Hudson,  which  were  to  be  the  foundations  of  this  ambitious 
dream,  are  still  to  be  seen.  The  road  collapsed  in  1859  and  was 
reorganized  as  the  Erie  Railway  with  the  famous  Daniel  Drew  as 
director  of  operations.  The  Drew  regime  lasted  until  1868  when 
Jay  Gould  and  "Jim"  Fisk  obtained  control,  the  operations  of 
these  gentlemen  lasting  through  four  spectacular  years.  There 
was  another  reorganization  in  1876,  and  for  a  time  the  road  was 
not  only  prosperous,  but  fairly  well  managed,  and  paid  divi- 
dends. 

The  legacy  of  debt  which  was  left  to  it,  however,  was  too 
heavy  and  it  went  down  with  so  many  other  roads  in  the  general 
collapse  of  1893  to  be  reorganized  into  the  present  company 
under  the  more  or  less  recognized  domination  of  the  Morgan 
interests  in  1895. 

Since  the  reorganization  the  mileage  of  the  road  has  in- 
creased but  slightly  and  the  main  effort  has  been  towards  re- 
building and  upbuilding  the  road. 

Ownership. 

The  Erie  stands  somewhat  apart  from  distinct  ownership 
by  other  great  systems,  though  it  is  a  part  of  the  community  of 
interest  organization.  Up  to  1904,  when  the  voting  trust  was 
dissolved,  the  road  was  directly  under  the  control  of  Morgan 
interests  and  nominally  so  remains. 

On  the  directorate  the  Morgan  interests  are  represented  by 
Charles  Steele,  of  the  firm  of  J.  P.  Morgan  and  Company 
and  Francis  Lynde  Stetson ;  and  in  more  or  less  close 
association  with  these  are  William  C.  Lane,  president  of  the 
Standard  Trust  Company;  Louis  L.  Stanton,  vice-president  of 
the  same ;  James  J.  Hill,  president  of  the  Great  Northern  and 
George  F.  Baker,  president  of  the  First  National  Bank.  New- 
York  Central  interests  are  represented  by  H.  McK.  Twombly ; 
and  D.  O.  Mills  is  also  a  director  in  the  New  York  Central  as 
well  as  Mr.  Baker.  Other  directors  include  E.  H.  Harriman, 
president  of  the  Union  Pacific,  also  a  director  in  the  Delaware 
and  Hudson;  Alexander  E.  Orr,  vice-president  of  the  Delaware 


308  ERIE 

and  Hudson  and  president  of  the  New  York  Life;  Norman  B. 
Ream  of  Chicago,  also  a  director  in  the  Lehigh  Valley,  the 
Baltimore  and  Ohio  and  other  roads;  John  J.  McCullough,  of 
Vermont,  also  a  director  in  the  Atchison ;  James  J.  Goodwin  and 
William  Pierson  Hamilton,  identified  with  insurance  interests 
in  New  York,  and  F.  D.  Underwood,  president  of  the  Erie,  also  a 
director  in  the  Toledo  and  Ohio  Central.  Mr.  Hill  presented 
his  resignation  as  a  director  in  1906,  but  his  resignation  was 
ignored  at  the  succeeding  annual  meeting. 

Of  the  Erie  directors,  four  are  also  directors  in  the  Lehigh 
Valley,  three  in  the  New  York  Central,  two  in  the  Lackawanna, 
two  in  the  Delaware  and  Hudson,  two  in  the  Reading,  and  three 
in  the  Baltimore  and  Ohio,  all  more  or  less  competing  roads. 

Directly  the  Erie  has  no  close  affiliations  with  other  lines 
other  than  with  the  New  York,  Susquehanna  and  Western,  which 
it  owns;  but  it  is  one  of  the  five  roads  which  own  an  extensive 
block  of  Lehigh  Valley  stock  and  practically  control  the  affairs 
of  that  corporation.  The  extent  of  the  Erie's  holdings  are  not 
specified. 

In  1905  the  Erie  reported  4,309  shareholders. 

Capitalization. 

Low  capitalization  has  not  generally  been  characteristic  of 
Morgan  reorganizations  and  the  Erie  in  its  reorganized  form, 
presents  no  exception.  On  June  30th,  1906,  its  capital  account 
stood  as  follows : 

Common  stock $112,378,900 

1st    Preferred 47,892,400 

2nd  Preferred 16,000,000 

Total    stock $176,271,300 

Funded  debt 206,634,900 

Equip.  Trusts 15,064,205 

Total  capital $397,970,405 

Rentals  capit.  at  4% 31,687,500 

Approx.  gross  capital $429,657,905 

Securities  held 1 10,888,864 

Approx.    net    capital $318,769,041 


ERIE  309 

Approx.  net  capitalization  per  mile $148,260 

Average  miles  operated 2,151 

Net  earnings  on  net  capitalization.  .  . .  4.8% 

Stock  on  net  capitalization 52% 

Fixed  Charges  on  Total  Net  Income.  .  66% 

Factor  of  Safety 34% 

It  will  be  seen  that  the  larger  part  of  the  road's  capitalization 
is  represented  by  its  own  stocks  and  bonds,  and  that  the  capita- 
lization of  rentals  paid  adds  but  little  to  the  total. 

Deducting  from  the  gross  capitalization  $110,000,000  of 
nominal  sucurities  held,  whose  nature  is  not  specified  in  the 
reports,  the  estimated  net  capitalization  amounts  to  $148,000 
per  mile,  a  sum  considerably  higher  than  that  of  the  New  York 
Central.  On  this  estimate,  the  net  earnings  of  1906  showed  only 
4.8%,  as  against  5.8%  for  the  New  York  Central,  8.1%  for  the 
Pennsylvania,  13.7%  for  the  Lackawanna,  and  14.7%  for  the 
Lehigh  Valley.  It  will  be  seen  therefore  that  in  comparison  with 
earnings  the  capital  is  high. 

About  half  of  the  estimated  capitalization,  however,  is  re- 
presented by  stock,  on  the  large  majority  of  which  no  dividends 
have  ever  been  paid. 

The  Fixed  Charges  are  high,  consuming  even  in  the  record 
year  of  1906,  66%  of  the  total  net  income,  leaving  a  margin  of 
safety  for  the  underlying  securities  of  only  about  33%.  This 
margin  is  about  the  same  as  that  of  the  New  York  Central,  but  it 
is  very  considerably  below  the  average  of  solid  roads.  On  the 
Lackawanna,  for  example,  the  Factor  of  Safety  is  62%,  and  on 
the  Pennsylvania  62%. 

Equities  Owned. 

Of  securities  to  the  nominal  value  of  $110,000,000  owned  by 
the  Erie,  the  reports  of  the  road  give  very  little  detail.  The 
income  from  these  securities  in  1906  was  only  $483,000,  or  not 
one-half  per  cent,  on  the  nominal  valuation. 

The  Erie  owns  practically  all  of  the  capital  stock  of 
the  New  York,  Susquehanna  and  Western,  amounting  to  $13,- 
000,000  preferred  and  $13,000,000  common,  of  which  about  half 
is  deposited  under  the  Pennsylvania  Collateral  Trust  Mortgage 
and  the  balance  held  free  in  the  treasury.  This  stock  was 
acquired  in  1898  when  Erie  first  preferred  and  Erie  common 
was   offered    share   for   share    for    the    Susquehanna   stock.      No 


310  ERIE 

dividends  have  been  paid  upon  this  stock  since  1892  and  none 
are  in  sight,  since  with  no  excessive  charges  in  1906,  the  road 
earned  a  deficit.  If  this  $25,000,000  and  more  of  stock  is  carried 
on  the  balance  sheet  of  the  Erie,  as  it  is  apparently  the  case  with 
the  unpledged  stock  in  the  treasury,  it  is  obvious  that  while 
this  might  lie  legitimately  employed  to  rebate  the  nominal 
capitalization  of  the  Erie,  it  represents  no  cash  assets  of  any  such 
value,  and  the  Erie's  equity  in  this  holding  is  represented  by  a 
deficit. 

The  Erie's  most  valuable  asset  is  its  coal  holdings.  With 
the  exception  of  the  directors  shares,  the  Erie  holds  the  entire 
capital  stock  of  the  Pennsylvania  Coal  Company,  the  Hillside 
Coal  and  Iron  Company,  Blossburg  Coal  Company,  and  the 
Northwestern  Mining  Exchange  Company.  The  larger  part 
of  these  stocks  were  acquired  in  1901  and  their  purchase  was 
paid  for  by  the  issue  of  $32,000,000  Pennsylvania  Collateral  4% 
gold  bonds  and  $5,000,000  of  the  first  preferred  stock. 

The  operations  of  these  companies  are  not  detailed  in  the 
report,  only  their  consolidated  balance  sheet  and  net  earnings  being 
shown.  In  1906  these  net  earnings  amounted  to  $1,595,140, 
but  after  paying  interest  on  bonds  outstanding  and  setting  aside 
$320,541  to  the  sinking  fund  of  the  Pennsylvania  Coal  Company, 
the  balance  sheet  showed  a  deficit  of  $45,000  to  the  Erie  Com- 
pany. When  the  five  millions  of  preferred  stock  also  issued  in 
exchange  for  these  companies  is  computed  at  4%,  it  will  be  seen 
that  the  advantages  of  the  purchase  to  the  railroad  did  not  show 
directly  in  its  income  account.  The  holdings  of  these  companies  in 
coal  lands  are  enormous,  the  coal  acreage  of  the  Pennsylvania  Coal 
Company  being  12,600  acres,  and  the  unmined  coal  estimated  at 
180,000,000  tons;  the  Hillside  Coal  and  Iron  Company,  7,200 
acres,  and  70,000,000  tons  of  unmined  anthracite;  or  a  total  of 
250,000,000  tons.  In  considering  the  assets  of  the  Reading  anil 
other  anthracite  roads,  their  holdings  of  unmined  coal  have  been 
reckoned  at  a  minimum  value  of  10  cents  per  ton;  and  if  this  were 
taken  as  a  basis  of  valuation,  the  Erie  would  have  an  asset  in  its 
coal  holdings  of  something  like  $75,000,000.  The  holdings  of 
bituminous  coal  are  also  large.  These  coal  properties  at  the  present 
time  are  earning  about  4%  on  the  $37,000,000  of  securities  issued  for 
their  purchase.  Whether  this  represents  the  full  net  earnings  of  the 
properties  or  no  is  none  too  clear,  but  it  seems  reasonable  to  suppose 


ERIE 


311 


that  with  the  steady  accretion  in  the  value  of  these  coal  fields  the 
Erie  should  have  a  large  if  at  present  indeterminate  asset. 

Increase  of   Capitalization. 

Since  1900,  the  Erie's  funded  debt  has  increased  about  $75,- 
000,000  and  its  preferred  stock  $5,000,000.  Of  this,  $33,000,000 
in  bonds  and  the  $5,000,000  of  preferred  stock  represents  the 
purchase  of  the  coal  stocks ;  and  $22,000,000  of  bonds  was  the  new 
convertible  issue  designed  primarily  for  the  purchase  of  the  Cincin? 
nati,  Hamilton  and  Dayton  stock,  but  after  the  abandonment  of  that 
enterprise,  turned  into  improvements  on  the  road.  The  increase  of 
capitalization  amounts  to  25%  and  the  gross  earnings  to  about  an 
equal  amount,  but  as  the  coal  issues  about  pay  for  themselves,  the 
increase  in  rail  earnings  has  been  somewhat  in  excess  of  the  in- 
crease in  capitalization.     The  items  stand  as  follows : 


•Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total  Gross 

Capital         Earnings 


1899-00  $112,357,410  {  ^6,'oOoioOO  /  $146.070,900  $ 


1905-06 


112,378,900  {    ?2$g$g}|  221,699,105 


397,970,405    47,461,401 


Character  of  Traffic. 

Of  the  total  tonnage  nearly  half,  or  about  47%,  is  made  up 
from  coal  and  coke,  in  about  equal  amounts  of  anthracite  and 
bituminous.  The  17,000,000  tons  of  coal  and  coke  yielded  a 
revenue  of  $12,000,000;  the  19,000,000  tons  of  merchandize  freight 
yielded  a  revenue  of  $23,000,000,  so  that  the  merchandise  earnings 
are  very  considerably  in  excess  of  the  coal  revenue. 

The  average  rate  per  ton  per  mile  was  .60c,  a  slight  de- 
crease from  the  previous  year. 

The  coal  earnings  have  grown  very  much  more  rapidly 
than  the  merchandize  earnings.  In  the  first  year  of  the  re- 
organized company  the  coal  earnings  were  only  $6,660,000 
against  $16,766,000  of  general  freight.  This  means  that  the  char- 
acter of  the  traffic  is  changing  in  exactly  the  opposite  sense  to 
that  of  the  Reading,  for  example,  and  instead  of  becoming  less 


312 


ERIE 


and  less  dependent  upon  a  single  industry  the  Erie  is  becoming 
more  so.     This  is  not  a  fact   which   makes  for  the   stability  of 


its  earnings. 


Stability  of  Earnings. 


From  the  last  year  of  the  receivership  to  1906,  the  earnings 
and  mileage  have  stood  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Earnings  per  Mile 

1895-6 

1896-7 

2,098 
2,125 
2,124 
2,109 
2,109 
2,156 
2,154 
2,153 
2,150 
2,151 
2,151 

$31,645,487 
31,495,031 
33  ,740  ,860 
33  ,752  ,703 
38,293,032 
39,102,302 
38,409,225 
43,509,139 
43,005,213 
43,321,647 
47,461,401 

$15,083 
14,821 

1897-8 

15,885 

1898-9.. 

15,529 

1899-0 

18,156 

1900-1 

IS, 138 

1901-2 

17  ,833 

1902-3.. . 

20,208 

1903-4 

20  ,000 

1904-5 

20  ,140 

1905-6 

22  ,065 

It  will  be  seen  that  with  a  very  slight  increase  of  mileage, 
the  gross  earnings  and  likewise  the  earnings  per  mile  have 
increased  more  than  50%. 

The  Erie  has  been  benefitted  very  considerably  by  the  in- 
troduction of  the  Community  of  Interest  idea,  the  average  rate 
per  ton  having  declined  to  .52c.  in  1899.  The  difference  of 
eight-tenths  of  a  mill  in  the  increased  rate  of  1906  represents  in 
the  earnings  of  that  year  about  $4,800,000,  or  about  one-third 
of  the  increase  in  earnings  over  1896. 

Maintenance. 

Like  other  roads  of  its  class,  the  Erie  has  been  charging  its 
maintenance  in  steadily  increasing  amounts,  the  total  increase 
from  1901  amounting  to  $2,000,  per  mile,  or  more  than  40%,  on 
an  increase  of  traffic  density  of  only  about  22%.  The  items  for 
the  six  years  have  stood  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

2,314,277 
2,203,036 
2,511,542 
2,413,562 
2,401,672 
2,764,827 

2,434,819 

$1,989 
1,848 
1,697 
1,841 
1,652 
2,139 

$1,861 

$2,809 
2,602 
2,662 
3,055 
3,533 
4,037 

$3,116 

84,798 
4,450 
4,359 
4,896 
5,185 
6,776 

Average 

$4,977 

ERIE 


313 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

Lackawanna .  .  . 
Lehigh  Valley.  . 

Reading 

N.  Y.  Central .  . 

3,163,799 
2,771,846 
3,420,895 
2,070,251 

$4,991 
2,588 
3,033 
2,722 

$3,608 
3,429 
5,181 
3,033 

$8,599 
6,017 
8,217 
5,755 

Although  the  Erie's  charges  have  been  undoubtedly  heavy, 
it  will  be  seen  that  they  have  averaged  considerably  below  that 
of  four  other  representative  roads  of  the  same  class.  If  we  aver- 
age the  charges  of  the  New  York  Central,  the  Lackawanna,  the 
Lehigh  Valley  and  the  Reading,  it  will  be  found  that  these  four 
roads  spent  through  these  six  years  $7,000  per  mile  per  annum, 
which  is  an  excess  of  $2,000  per  mile  or  40%  over  the  average 
charges  for  the  Erie,  with  an  average  difference  of  freight  density 
of  only  16%.  This  average  charge  of  these  four  roads  was  in 
excess  even  of  the  heavily  increased  charges  for  the  Erie  in  1906. 
In  other  words,  the  Erie's  charges  were  not  up  to  the  standard  set 
by  competitive  roads  of  the  same  class.  If,  therefore,  any  attempt 
were  made  to  scale  the  Erie's  charges  materially  below  the  figures 
of  recent  years  the  road  would  inevitably  fall  behind  other  roads  of 
its  class.  It  would  seem  dubious  policy  therefore,  for  the  investor 
to  count  upon  any  considerable  amount  of  concealed  surplus  in 
these  items.  If  several  standard  roads  pursue  a  nearly  similar 
policy,  as  it  is  evident  that  the  standard  roads  mentioned  have  done, 
it  is  obvious  that  other  roads  in  the  same  class  must  more  or  less 
meet  this  standard  in  order  to  keep  up  their  end  of  the  game. 

Improvements   From  Earnings. 

From  1901-2  the  maintenance  charges  show  a  decrease  of 
about  $350  per  mile.  This  was  due  to  a  change  in  bookkeeping 
methods,  and  the  report  of  the  president  stated  that  in  1901  and 
the  year  previous  considerable  sums  had  been  expended  on  im- 
provements, the  cost  of  which  was  charged  to  operating  ex- 
penses. Since  1902  there  has  been  a  separate  item  for  these  im- 
provement charges.  Adding  the  sums  for  the  two  previous 
years,  the  amounts  set  aside  from  earnings  for  improvement  pur- 
poses stand  as  follows : 

1899-00 $1,177,040 

1900-1 1.153,540 

1901-2 1,257,857 

1902-3 2,377,856 


314 


ERIE 


1903-4. 
1904-5. 
1905-6. 


1,540,320 
1,360,555 
1,926,973 


Total $10,794,141 

These  are  nothing  like  the  sums  set  aside  by  the  Lacka- 
wanna, for  example,  but  they  at  least  show  a  disposition  of  the 
management  to  pay  for  improvements  from  earnings  so  far  as 
earnings  will  justify,  and  taken  in  connection  with  the  liberal 
maintenance  shown  especially  in  1905  and  1906,  they  go  to  ex- 
plain why  it  has  been  possible  to  keep  down  the  cost  of  conduc- 
ting transportation  in  the  face  of  increased  business. 

Surplus  Earnings. 
The    surplus    shown    over    and    above    these    maintenance 
charges  and   Fixed   Charges   since   1901,   but   before   charging  out 
Improvement  Appropriations,  stands  as  follows : 


Year 

Surplus 

Dividends  on 

1st  Preferred 

Stock 

Per  cent. 

Earned  on 

Common 

Average 
Price 

1900-1 

$2,823,157 
4,384,676 
8,433,266 
4 ,552  ,053 
4,406,596 
5,016,643 

1* 

3 
3* 

4 
4 
4 

2.2% 

1.6- 

5.2 

1.7 

1.6 

2.2 

23 

1901-2 

39 

1902-3 

31 

1903-4 

28 

1904-5. . 

47 

1905-6 

44 

(4%  was  paid  on  Second  Preferred  1905-6). 

Between  1903,  when  a  larger  surplus  was  shown  than  in  any 
of  the  years  under  view,  and  1906,  there  was  a  difference  in 
maintenance  charges  amounting  to  $1,400  per  mile,  and  this  on 
the  2,150  miles  of  railroad,  represents  a  difference  of  nearly  three 
million  dollars.  This  is  nearly  the  difference  in  the  surplus 
shown,  and  this  difference  of  30%  in  the  maintenance  charges 
per  mile  was  on  a  difference  in  freight  density  of  only  about  10%. 

In  the  same  period  the  cost  of  transportation  has  increased  but 
slightly,  and  relatively  to  the  traffic  density  has  decreased,  show- 
ing that  the  heavy  charges  for  maintenance  are  bearing  fruit. 
If  the  Erie  could  be  normally  maintained  on  the  basis  of  1903, 
it  would  therefore  be  comfortably  earning  four  or  five  per  cent, 
on  its  common  stock  over  and  above  the  preferred  dividends ; 
but  for  the  reasons  already  stated  this  is  a  misleading  process  of 
reasoning,  and  it  is  likely  that  the  surplus  shown  in  1906  repres- 
ents much  nearer  a  safe  and  legitimate  surplus  than  that  of  1903. 


ERIE  315 

Dividend  Record. 

The  Erie  in  the  old  days  was  never  a  dividend  earner  save 
for  stock  market  purposes.  The  reorganized  company  paid  no 
dividends  on  its  stock  whatever  for  its  first  six  years.  It  began 
paying  a  dividend  on  its  first  preferred  in  1901,  the  full  4%  being 
paid  in  1904  and  since.  In  1905  and  1906  the  4%  was  paid 
on  the  second  preferred. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906  the  balance  sheet 
showed : 

Current   assets $11,994,909 

Current   liabilities 7,372,970 

Leaving  a  working  balance  of .  . .' $4,621,939 

Of  the  current  assets,  $7,501,830  was  in  cash.  In  addition 
to  the  items  shown  under  these  heads,  there  was  cash  with  the 
trustees  for  new  equipment  of  $8,476,800;  materials  and  supplies 
on  hand,  $3,882,049,  and  due  from  subsidiary  companies, 
$3,644,418. 

The  amount  to  the  credit  of  Profit  and  Loss  was  $11,979,461. 
Balancing  these  items  was  about  three   and  a  half  million 
dollars  due  for  interest  and  dividends  accrued. 

Investment  Value. 

At  the  annual  meeting  of  1906,  President  Underwood  said 
that  the  important  grade  reductions  between  Port  Jervis  and 
Jersey  City,  mentioned  in  the  annual  report,  would  be  completed 
in  a  year.  The  report  stated  that  the  grades,  with  one  exception, 
would  be  reduced  to  a  maximum  of  0.2  per  cent,  eastbound,  and 
0.6  per  cent,  westbound,  as  compared  with  1.25  per  cent,  on  the 
present  line. 

What  this  means  to  operation  Mr.  Underwood  illustrated  by 
saying  that  on  the  new  grades  19  engines  could  do  the  work  now 
done  by  43  engines. 

President  Underwood  said  further  that  Cleveland  was 
rapidly  becoming  the  most  important  city  between  New  York 
and  Chicago  in  the  Erie's  territory  and  that  therefore  the  Erie's 
plan  to  have  a  direct  east  and  west  line  through  the  city  meant 
much  to  the  future  position  of  the  road.     While  on  the  map  the 


316  ERIE 

plan  to  form  a  loop  to  Cleveland  by  constructing  a  small  amount 
of  mileage  west  of  the  city  and  using  trackage  of  the  Big  Four 
might  seem  to  be  roundabout,  in  reality  it  would  give  the  Erie 
a  line  from  Cleveland  to  Chicago  six  miles  shorter  than  any  other 
and  from  Cleveland  to  New  York  as  short  as  any. 

The  contract  under  which  the  McAdoo  tunnel  companies 
will  carry  Erie  passengers  into  Manhattan  was  still  under  negoti- 
ation. President  Underwood  said  the  Erie  did  not  contemplate 
the  construction  of  its  own  tunnel  at  any  time,  but  the  contract 
would  provide  that  after  a  stated  time  the  Erie  might  run  its  own 
electric  trains  through  the  tunnels.  The  question  of  terms  was 
the  principal  one  delaying  the  conclusion  of  the  contract.  The 
electrification  of  the  lines  within  25  miles  of  New  York  still  en- 
gaged the  attention  of  the  company's  commission  of  experts.  As 
soon  as  they  had  made  their  report  and  the  funds  had  been  pro- 
vided, the  work  would  be.  undertaken. 

Reference  having  been  made  to  the  effect  of  the  coal  strike 
upon  the  year's  earnings,  President  Underwood  remarked  that 
he  considered  a  cessation  of  mining  as  business  merely  deferred, 
not  lost.    He  added  : 

"A  more  serious  menace,  and  the  chief  one  to  which  the 
Erie  is  exposed,  is  the  growing  export  trade  of  the  gulf  ports, 
principally  New  Orleans  and  Galveston.  The  distance  from 
Chicago  to  tidewater  is  about  the  same  whether  to  gulf  or  At- 
lantic ports,  but  the  former  have  the  advantage  of  two  practically 
water-level  routes,  while  the  eastern  trunk  lines  have  to  haul 
across  a  mountain  chain.  Formerly  we  could  rely  upon  the  fact 
that  nearly  all  the  shipping  came  to  this  port,  but  now  the  ship- 
ping has  a  tendency  to  go  to  the  gulf. 

"The  only  thing  to  be  done  about  it  is  to  put  our  lines  in  the 
best  possible  condition  to  handle  the  business  expeditiously  and 
at  low  cost.  Our  competitors  have  made  great  improvements  in 
their  lines  in  recent  years,  and  we  must  do  the  same." 

Such  being  the  immediate  prospects  we  may  consider  the 
investment  value  of  the  stocks.  Both  the  first  and  the  second 
preferred  stocks  are  limited  to  non-cumulative  dividends  of  4% 
and  the  company  has  the  right  to  retire  these  preferred  stocks 
at  par  in  cash. 

Erie  first  preferred  sold  as  low  as  $30  per  share  in  1900  be- 
fore the  dividend  era  began.  Upon  the  payment  of  the  full  4% 
dividend  in  1904,  it  sold  as  high  as  $77  per  share,  in  1905  at  $85, 


ERIE  317 

and  in  March,  1907,  at  $57.  At  an  average  price  of  about  $66  per 
share  the  stock  yields  6%  with  a  fair  margin  of  safety  for  the 
dividend.  The  $48,000,000  of  first  preferred  requires  a  little  less 
than  $1,900,000  and  the  average  surplus  for  six  years  shown  after 
fairly  heavy  charges  was  nearly  $5,000,000  per  annum.  These, 
it  is  true,  were  years  of  extraordinary  prosperity ;  but  in  conse- 
quence of  the  heavy  improvements  which  have  been  carried  out. 
the  property  is  in  a  condition  that  it  never  was  in  before,  and  its 
earnings  are  very  considerably  greater. 

But  becoming  more  and  more  dependent  upon  the  coal  in- 
dustry for  its  earnings,  Erie  is  not  in  the  same  position  as  other 
roads  with  more  widely  distributed  traffic.  It  is  easy  to  see  that 
with  prolonged  labor  difficulties  in  a  single  industry,  its  earnings 
could  be  very  seriously  impaired,  though  in  case  of  decreased 
earnings  it  is  in  a  position  now  to  scale  its  maintenance  charges 
without  impairing  the  efficiency  of  the  road.  Limited  to  4%  and 
redeemable  at  par,  the  first  preferred  has  no  great  speculative 
possibilities,  and  with  1906-7  rates  for  money  the  investor  will 
probably  conclude  that  even  on  a  6%  selling"  basis,  the  stock  was 
not  over  cheap.  On  this  basis,  however,  it  might  show  good 
returns,  should  money  conditions  improve  and  the  heavy  capital 
requirements  of  the  road  not  prejudice  the  safety  of  its  dividend. 

The  second  preferred  amounts  to  only  $16,000,000;  the  4% 
dividend  requires,  therefore,  $640,000  additional;  and  on  the 
same  basis  noted  above,  it  is  to  be  regarded  as  a  rather  specu- 
lative security.  In  1904  when  its  dividend  was  begun,  the  stock 
could  have  been  bought  for  $33  per  share.  It  sold  as  high  as  $78 
per  share  in  1905  and  showed  an  average  price  of  about  $70  per 
share  in  1906;  in  March,  1907,  it  sold  at  $35.  From  these  figures 
it  is  evident  that  its  security  is  not  highly  regarded.  Neverthe- 
less, bought  at  anything  like  1907  prices,  and  held,  it  might  yield 
a  handsome  speculative  profit  in  time.  It  is  not  to  be  regarded 
otherwise  than  as  a  speculation. 

It  is  obvious  that  no  dividend  could  be  paid  on  the  enormous 
amount  of  common  stock  outstanding  unless  the  dividend  on 
both  the  preferred  stocks  were  thoroughly  assured. 

Erie  common  represents  one  of  the  "low  price"  favorites 
of  the  Stock  Exchange,  and  because  of  the  huge  quantity  of 
stock  outstanding  ($112,000,000),  the  expectation  of  a  dividend 
has  not  been  very  great.  In  1902,  on  account  of  the  heavy  in- 
crease of  the  earnings  shown,  the  stock  was  run  up  to  $44  per 


318  ERIE 

share.  It  declined  to  $21  per  share  in  1904,  rising  to  $52  in 
1905.  It  did  not  again  reach  the  latter  figure  even  under  the 
exceptional  showing  of  1906  and  sold  again  at  $20  in  June, 
1907.  It  is  evident  that  bought  at  the  low  figures  the  stock  repre- 
sented in  this  period  an  enormous  opportunity  for  profit,  but  it 
is  to  be  recalled  that  the  slump  of  1903-4  was  a  stock  market 
slump  and  that  the  general  business  of  the  country  was  very 
little  affected.  The  stock  market  recovery,  therefore,  was  ex- 
tremely rapid.  Precisely  a  repetition  of  this  is  not  likely  to  occur 
soon.  Of  course,  if  the  steady  increase  of  earnings  through  six 
years  could  continue,  even  in  somewhat  abated  degree,  the  stock 
might  receive  a  small  dividend  within  a  few  years,  but  there  are 
probably  many  other  non-dividend  stocks  on  the  list  which  will 
receive  dividends  before  Erie  common. 

Erie  Convertibles. 

The  Erie  has  outstanding  two  series  of  4%  convertible  bonds, 
$10,000,000  of  Series  "A,"  convertible  into  common  stock  at  50 
and  $12,000,000  of  Series  "B,"  convertible  into  the  same  stock 
at  60.  In  1906  Series  'A"  was  quoted  as  high  as  109  and  was  not 
quoted  below  par  throughout  the  entire  year.  In  March  of  1907 
these  bonds  sold  down  to  76,  declining  in  sympathy  with  the  fall 
of  the  common  stock  from  above  50  to  below  22.  A  quotation 
of  50  on  Erie  common  could  be  due  only  to  speculative  excite- 
ment and  clever  manipulation.  Obviously  the  price  of  the  con- 
vertibles would  follow  this,  so  long  as  there  seemed  a  remote 
chance  of  profit.  As  soon  as  this  prospect  faded,  the  bonds  sold 
on  their  merits  as  a  4%  obligation,  subject  to  many  prior  liens. 
It  seems  improbable  that  Erie  common  will  sell  much  above 
$50  per  share  for  many  years  to  come  and  the  conversion  feature 
of  these  bonds,  therefore,  is  of  value  only  in  so  far  as  the  stock 
might  be  again  run  up  to  these  high  quotations.  Convertible  into 
Erie  common  on  a  basis  of  $50  per  share,  obviously  the  bonds 
would  show  a  profit  whenever  the  price  of  the  common  exceeded 
one-half  the  amount  paid  for  the  bonds.  Probably  only  a  return 
to  such  conditions  as  those  of  1902  or  1906  would  make  this 
feature  of  any  value. 


EVANSVILLE  AND  TERRE  HAUTE 
RAILROAD. 

(Including  Evansville  &  Indianapolis  Railroad). 

The  Evansville  &  Terre  Haute  is  now  one  of  the  smaller  sub- 
sidiaries of  the  Rock  Island  system — that  is  to  say,  a  large  ma- 
jority of  its  stock  is  owned  by  the  Chicago  &  Eastern  Illinois, 
which  is  in  turn  owned  by  the  St.  Louis  &  San  Francisco,  which 
in  turn,  is  controlled  by  the  Rock  Island  Company.  In  1906  the 
reports  of  the  Evansville  &  Terre  Haute  included  the  operations 
of  the  Evansville  &  Indianapolis  Railroad,  all  of  whose  stock 
($2,000,000)  is  owned  by  the  former.  Prior  to  1905-6  the  Evans- 
ville &  Indianapolis  was  operated  separately. 

The  operations  for  1906  covered  310  miles  of  track,  extend- 
ing from  Terre  Haute,  where  the  road  joins  the  Chicago  & 
Eastern  Illinois,  to  Evansville  and  Mt.  Vernon  on  the  Ohio  River, 
with  a  parallel  line  from  Evansville  northward  to  Brazil,  Indiana. 
As  of  June  30th,  1906,  the  Chicago  &  Eastern  Illinois  owned 
$3,161,433  of  the  $3,987,383  of  the  outstanding  common  stock, 
leaving  $825,950  in  the  hands  of  the  public  There  was  also  out- 
standing $1,283,333  of  the  preferred. 

The  consolidated  earnings  for  1906  amounted  to  $2,163,680, 
or  $6,979  per  mile.  The  total  net  income  for  the  year  amounted 
to  $1,076,875.  Of  this,  67%  was  consumed  by  fixed  charges, 
leaving  a  balance  of  $685,486.  This  was  equivalent  to  the  full 
5%  on  the  preferred  and  8.2%  on  the  outstanding  common  stock. 
The  maintenance  charges,  like  those  of  the  other  roads  be- 
longing to  the  'Frisco  system,  were  not  overly  high.  On  a  freight 
traffic  density  of  480,122  ton  miles,  the  maintenance  of  way- 
amounted  to  ^730  per  mile  and  maintenance  of  equipment  to  $995, 
or  a  total  of  $1,725.  It  was  on  the  basis  of  these  low  maintenance 
charges  that  operating  expenses  amounted  to  only  51%  of  the 
gross  receipts  from  operation.  The  company  states  that  $42,920 
in  additions  and  improvements  was  charged  to  operating  ex- 
penses during  the  year. 

(319) 


320  EVANSVILLE  &  TERRE  HAUTE 

The  full  5%  has  been  paid  on  the  preferred  since  1899.  From 
1902  to  1905,  inclusive,  no  dividends  were  paid  on  the  common, 
but  4%  was  declared  in  1906,  or  one-half  of  the  surplus  nomin- 
ally remaining  after  fixed  charges  and  preferred  dividends. 

The  preferred  stock  may  be  regarded  as  a  fairly  solid  5% 
stock,  liable,  however,  to  sell  somewhat  below  its  actual  value  on 
account  of  the  prevalent  prejudice  which  exists  against  Rock 
Island  securities. 

The  dividend  on  the  preferred  does  not  appear  to  be  overly 
stable  and  in  less  prosperous  times  than  in  the  year  of  1906  might 
readily  be  reduced  or  passed. 

The  margin  of  safety  on  the  underlying  securities  is  not 
very  high,  but  would  probably  be  regarded  as  sufficient  did  the 
road  not  belong  to  a  system  which,  apparently,  in  the  minds  of 
the  public  has  not  yet  passed  the  probationary  stage  or  com- 
pletely demonstrated  its  ability  to  withstand  a  considerable  re- 
cession in  business. 


GEORGIA  SOUTHERN  AND  FLORIDA 

RAILWAY. 

The  Georgia  Southern  is  one  of  the  subsidiary  roads  of  the 
Southern  Railway  system.  It  has  the  same  chief  officers  as  the 
latter  but  is  separately  operated.  The  present  line  includes  the 
Atlantic,  Valdosta  &  Western,  and  in  1906  the  operations  covered 
395  miles  of  track. 

The  gross  earnings  were  $1,994,946  or  $4,924  per  mile.  Oper- 
ating expenses  in  1906  consumed  74%  of  the  gross  earnings, 
leaving  a  total  net  income  of  $515,842.  Fixed  charges  consumed 
70%  of  this  amount,  leaving  a  surplus  of  only  $160,159.  After 
the  payment  of  the  full  5%  dividends  on  the  first  and  second  pre- 
ferred stock  this  left  a  balance  equivalent  to  about  4%  on  the 
$2,000,000  of  outstanding  common  stock. 

The  traffic  density  of  the  road  is  low,  amounting  to  219,921 
ton  miles  per  mile  of  road  in  1906.  Charges  for  maintenance  of 
way  were  $669  and  for  maintenance  of  equipment  $993,  which 
may  be  regarded  as  ample. 

The  full  5%  on  the  first  preferred  has  been  paid  since  1897 
and  the  full  5%  on  the  second  preferred  was  paid  in  1906.  Pre- 
vious to  that,  from  1900,  4%  was  paid.  It  is  evident  from  the 
high  percentage  of  fixed  charges  on  total  net  income  that  the 
margin  of  safety  for  the  preferred  stocks  is  not  overly  large  and 
that  they  belong  still  in  the  class  of  somewhat  speculative  invest- 
ments. 

No  dividend  is  being  paid  on  the  common  and  the  amount 
earned  in  1906  and  previous  years  does  not  suggest  immediate 
prospect  for  any  such  payments. 


21  (821) 


GRAND  RAPIDS  AND  INDIANA  RAILWAY. 

The  Grand  Rapids  and  Indiana  is  one  of  the  subsidiary  lines 
of  the  Pennsylvania  system,  operating  a  north  and  south  road 
from  Richmond,  Ind.,  up  through  western  Michigan  towards 
Mackinac.  The  operations  of  the  company  comprise  also  the 
Cincinnati,  Richmond  and  Fort  Wayne,  the  Muskegon,  Grand 
Rapids  and  Indiana,  and  the  Travers  City  railroads.  The  total 
mileage  operated  in  1906  was  579  miles. 

Of  the  $5,791,700  of  capital  stock,  the  Pennsylvania  Com- 
pany owns  $2,902,600,  or  more  than  a  majority  of  the  stock,  and 
the  directors  and  officers  of  the  road  are  principally  officials  of 
the  Pennsylvania  Company. 

On  January  1st,  1907,  the  capital  account  of  the  road  stood 
as  follows : 

Common  stock $5,791,700 

Funded    debt 9,775,000 

Total  capital $15,566,700 

Rentals  capit.  at  4% 4,250,000 

Approx.  gross  capit $19,816,700 

Approx.  capital,  per  mile $34,229 

Average   miles   operated 579 

Net  earnings  on  total  capitalization ....  6.0% 

Stock  on  total  capitalization 29% 

Fixed  Charges  on  total  net  income. .  .  .  76% 

Factor  of  Safety 24% 

The  6%  which  the  net  earnings  show  on  the  estimated  capi- 
talization are  the  net  earnings  in  the  report.  This,  however,  is 
after  rather  heavy  maintenance,  amounting  in  1906  to  over  $2,600 
per  mile.  These  charges  on  a  road  with  a  traffic  density  of  only 
731,000  ton-miles  per  mile  of  road,  are  certainly  high,  and   un- 

(322) 


GRAND  RAPIDS  &  INDIANA 


323 


doubtedly  represent  the  Pennsylvania  policy  of  large  improve- 
ments from  earnings.  Similarly  the  percentage  of  Fixed  Charges 
on  the  Total  Net  Income  would  show  a  much  lower  figure  if 
maintenances  expenses  had  not  been  so  heavily  charged.  These 
charges  for  a  series  of  years  have  compared  as  follows : 


Maintenance  per  Mile 

Year 

Traffic  Density 

Total 

Way 

Equipment 

1900 

399  ,603 

$1  ,088 

827 

$1  ,915 

1901 

447  ,682 

1,160 

820 

1,980 

1902 

494  ,786 

1,136 

965 

2,101 

1903 

490  ,883 

1,114 

1,092 

2  ,206 

1904 

524  ,244 

1,108 

982 

2,090 

1905 

649,016 

1,054 

1,216 

2,270 

1906 

731,341 

1,229 

1,387 
$1  ,041 

2,616 

Average 

533  ,936 

$1,127 

$2,168 

Earnings  over  a  series  of  years  have  been  as  follows 


Year  Ending 
December  31st 

Miles 

Gross  Earnings 

Net  Earnings 

1897 

586.40 
589.82 
583.98 
581.63 
589.95 
589.95 
589.95 
573.39 
581.79 
579.02 

$2,542,086.88 
2,784,844.94 
3,146,165.27 
3,376,182.36 
3,654,725.31 
4,014,775.56 
4,238,885.83 
4,149,727.35 
4,484,193.05 
4,795,103.04 

$655,779.59 

1898 

733,990.43 

1899 

791 ,350.30 

1900 

759,372.25 

1901 

895,388.83 

1902 

957,356.18 

1903 

1904 

817,293.49 
746,226.19 

1905 

871 ,313.73 

1906 

950,970.83 

The  gross  earnings  in  1906  amounted  to  $8,281  per  mile. 
The  net  income  shown  after  the  payment  of  rentals  and  charges 
amounted  to  $179,976  in  1904,  $258,587  in  1905,  and  $286,162  in 
1906.  The  surplus  shown  amounted  to  only  4.3%  of  the  gross 
income  in  1904,  5.7%  in  1905,  and  6%  in  1906.  The  charges  for 
conducting  transportation  and  general  expenses  were  high,  and 
these,  with  the  high  maintenance  charges,  are  responsible  for 
the  low  percentage  of  surplus  shown. 

Since  1900  the  stock  has  paid  a  3%  dividend,  leaving  but  a 
small  annual  surplus. 

The  balance  sheet  at  the  close  of  1906  showed  an  excess  of 
about  $260,103  of  current  assets  over  liabilities.  The  item  of 
cash  was  $687,244,  and  the  balance  to  credit  of  Profit  and  Loss 
was  $448,530. 


324  GRAND  RAPIDS  &  INDIANA 

The  road  is  apparently  in  good  financial  position,  its  mainte- 
nances charges  are  heavy,  and  its  business  has  been  increasing 
steadily  since  the  reorganization  of  the  company  in  1896.  The 
gross  earnings  have  increased  about  75%,  while  the  net  earnings 
have  only  increased  about  33%.  This  is  largely  due  to  the 
Pennsylvania  policy  of  ample  maintenance  and  improvements. 

On  a  3%  basis,  with  sound  conditions,  steadily  increasing 
earnings,  excellent  prospects,  and  the  backing  of  a  powerful 
system  like  the  Pennsylvania,  the  stock  should  readily  sell  for 
$60  to  $80  per  share.  If  bought  at  some  such  figure  as  this,  an 
investment  would  probably  show  a  steady  increment  in  value 
from  year  to  year,  though  in  the  report  of  1906  the  company 
complains  of  the  burdens  which  the  State  of  Michigan  imposes 
in  heavy  taxation  and  rate  laws. 


GRAND  TRUNK  RAILWAY  OF  CANADA. 

The  Grand  Trunk  operates  a  network  of  roads  in  eastern 
Canada,  extending  from  Portland,  Maine,  and  Quebec,  along  the 
St.  Lawrence  River  to  Port  Huron,  and  thence  to  Chicago. 
Through  its  practical  ownership  of  the  Central  Vermont,  it  reaches 
southward  from  Montreal  to  New  Haven,  Conn.  Directly  in  1906 
the  Grand  Trunk  operated  3,535  miles  of  road,  with  663  miles  of 
additional  main  track.  It  also  owned  all  the  stock  of  the  Grand 
Trunk  Western,  336  miles,  of  the  Detroit,  Grand  Haven  &  Mil- 
waukee, 189  miles,  and  of  the  Toledo,  Saginaw  &  Muskegon,  116 
miles,  and  of  the  Central  Vermont,  531  miles,  and  a  majority  of  the 
stock  of  the  Canada  Atlantic,  468  miles,  bringing  the  total  mileage 
operated  and  controlled,  up  to  5,175  miles.  It  is  also  financing  the 
construction  of  the  Grand  Trunk  Pacific  (which  see). 

The  Grand  Trunk  is  owned  in  England,  and  all  its  directors 
reside  in  that  country.  The  present  Grand  Trunk  represents  the 
consolidation  in  1882  of  a  company  of  the  same  name,  with  the 
Great  Western  Company.  In  1888,  the  Northern  Railway  of 
Canada  was  absorbed  and  control  of  the  Canada  Atlantic  was 
secured  in  1904.  The  road  divides  the  pre-eminence  of  Canadian 
railways  with  the  Canadian  Pacific,  in  rather  sharp  rivalry,  and 
it  has  no  especial  affiliations  with  any  large  American  system. 

The  company's  reports  are  made  up  semi-annually,  and  unlike 
the  Canadian  Pacific,  figures  as  to  capital,  earnings,  etc.,  are  given 
not  in  Canadian,  but  in  English  money;  that  is,  in  pounds,  shillings 
and  pence.  This  is  doubtless  for  the  convenience  of  the  English  in- 
vestor. The  Grand  Trunk  is  capitalized  and  conducted  along  Eng- 
lish lines,  that  is  to  say,  its  capitalization  per  mile  is  about  three 
times  that  of  other  American  roads  with  similar  earnings,  and  as 
its  securities  and  shares  command  a  price  in  the  English  market 
much  beyond  that  which  they  could  secure  in  the  American  market, 
it  has  not  been  deemed  worth  while  to  translate  the  figures  into 
American  or  Canadian  money.  This  translation  has  laboriously 
been  made  by  Mr.  Mundy  in  his  "Earning  Power  of  Railroads," 
where   it  is  to  be   found. 

(325) 


326         GRAND  TRUNK  OF  CANADA 

Capitalization. 

As  of  June  30th,  1906,  the  capital  account  (in  pounds,  not  dol- 
lars), stood  as  follows: 

Consolidated   stock £22,475,985 

4%  guaranteed 8,129,315 

1st  preferred  stock 3,420,000 

2nd  preferred   stock 2,530,000 

3rd  preferred  stock 7,168,055 

Total  stock £43,723,355 

Funded  debt — 

Debenture  stock,  4% 22,477,426 

Loan  capital 1,911,000 

Can.   Gov.  advances 3,111,500 

Total  capital £71,223,281 

Total  cap.  per  mile £20,148 

Average   miles   operated 3,535 

Net  earnings  on  total  capital 2.5% 

Stock  on  total  capitalization 60% 

Fixed  Charges  on  Total  Net  Income.  .  65% 

Factor  of  Safety 35% 

In  1906  the  Grand  Trunk  paid  in  rentals  about  £150,000  and 
advanced  a  little  less  than  £50,000  to  make  up  the  deficit  for  the 
operations  on  the  Canada  Atlantic,  which,  like  the  rentals,  repre- 
sented employment  of  capital.  On  the  other  hand,  from  securi- 
ties owned,  the  Grand  Trunk  received  a  little  over  £200,000;  that 
is,  income  from  other  sources  about  balanced  rentals  and  deficit 
advances.  In  the  makeup  of  the  table  above,  therefore,  these 
items  have  been  neglected,  as  they  would  not  affect  the  result 
and  the  total  capital  of  the  company  thus  becomes  the  equivalent 
of  the  net  capitalization  on  other  American  roads. 

It  will  be  seen  that  the  capitalization  is  very  high,  amount- 
ing to  £20,148,  or  nearly  $100,000  per  mile.  The  Grand  Trunk 
d(»es  not  traverse  a  mountainous  section;  a  large  part  of  its  line 


GRAND  TRUNK  OF  CANADA         327 

is  water  grade;  it  was  not  built  recently,  and  its  gross  earnings 
in  1906  were  only  about  $8,700  per  mile.  This  is  about  the  aver- 
age earnings  of  such  roads  in  the  middle  West  as  the  North 
Western,  the  St.  Paul  and  the  Burlington,  which  have  been  built 
through  a  country  about  as  thickly  settled  as  Canada  and  whose 
total  capitalization  per  mile  averages  around  $30,000.  The  Grand 
Trunk's  capitalization  of  $100,000  per  mile  compares  likewise 
with  a  gross  capitalization  for  the  Canadian  Pacific  of  $35,000 
per  mile,  with  gross  earnings  of  $7,100  per  mile. 

This  high  capitalization  is  further  reflected  in  the  fact  that 
the  net  earnings  of  1906  represent  only  2,5%  on  the  capital,  as 
against  9.4%  for  the  Canadian  Pacific,  8.1%  for  the  Pennsylvania, 
8.8%  for  the  Michigan  Central,  13%  for  the  Lake  Shore,  &c.  In 
other  words,  about  two-thirds  of  the  capitalization  is  what  is  vulgarly 
described  in  America  as  "water."  Actually,  the  gross  capital- 
ization of  the  Grand  Trunk  (about  $350,000,000),  operating  about 
3,500  miles  of  road,  considerably  exceeds  the  gross  capitalization 
of  the  Canadian  Pacific,  operating  over  9,000  miles  of  road. 

A  considerable  part  of  this  over-capitalization,  however,  is 
represented  by  stock,  upon  which  no  dividends  have  been  paid 
and  from  the  present  outlook  never  will  be  paid,  at  any  near  date. 
The  total  stock,  including  the  guaranteed  4%  stock  issued  to 
Great  Western  shareholders  at  the  time  of  the  consolidation, 
represents  60%  of  the  gross  capitalization.  Nevertheless,  even 
with  this  favorable  arrangement,  fixed  charges,  including  rentals, 
are  high,  consuming  in  1906,  65%  of  the  total  net  income,  leaving 
only  35%  margin  of  safety  for  the  underlying  securities.  The 
actual  mortgage  debt  of  the  road,  however,  is  very  small,  the 
larger  part  of  the  funded  debt  being  represented,  after  the 
English  fashion,  by  debenture  stock,  not  foreclosable,  but  on 
which  the  dividend  is  cumulative. 


Stability  of  Earnings. 

The  Grand  Trunk  traverses  a  country  whose  population  is 
more  or  less  fixed — its  earnings  are  stable  and  present  no  great 
variation  from  year  to  year.  The  following  table  made  up  by 
the  Financial  Chronicle  from  the  cumbersome  and  difficult  semi- 


328 


GRAXD  TRUNK  OF  CANADA 


annual  reports  of  the  road  show  receipts  and  disbursements  for 
three  calendar  vears : 


Years  Ending  Dec.  31st 

Gross  Earnings 

1905 
$6,018,001 
4,269,153 

""$1,748,848 

1,951,232 

155,206 

i!  1,071,144 

11,070 

(4)  275,358 

(5)  170,842 
(5)  126,420 
(2)  143,293 

def.  $2,101 

1904 

$5,689,130 

4,100,660 

$1,588,470 

1,787,232 

155,206 

1,070,505 

4,807 

(4)  255, 5o2 

(5)  170,842 
(5)  126,420 

1903 
$5,916,548 

Net  Earnings 

4,209,115 
$1,707,433 

Total  Net  Income 

1,891,170 

Rentals..                

155,206 

Int.  on  Bonds  &  Deb.  Stock .... 

Advances  to  Controlled  Roads . 

Dividend  on  Guar.  Stock 

Do.        on  1st  Pfd.  Stock 

Do.        on  2nd  Pfd.  Stock.  .  . 
Do         on  3rd  Pfd.  Stock 

i  1,068,690 
13,901 

(4)  214,160 

(5)  170,842 
(5)jl26,420 
(2),143,293 

Balance 

"sur.  $3,920 

def.  $342 

Maintenance  Charges. 
The  following  comparison,  taken  from  Mr.  Mundy's  "Earn- 
ing Power  of  Railroads,"  gives  the  traffic  density  and   mainte- 
nance charges  for  the  fiscal  years  of  1905  and  1906: 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1904-5 
1905-6 

731,091 
802,260 

$1,171 
1,257 

$1,081 
1,435 

$2,252 
2,692 

According  to  Mr.  Mundy's  computation,  maintenance  ex- 
penses consumed  25%  of  the  gross  income  in  1904,  nearly  27% 
in  1905,  and  nearly  30%  in  1906.  From  this  it  will  be  seen  that, 
revenues  remaining  about  the  same,  the  maintenance  expendi- 
tures for  1906  were  unusually  heavy.  Yet  on  a  road  of  the  char- 
acter and  traffic  density  of  the  Grand  Trunk,  they  were  scarcely- 
excessive,  and  probably  represented  around  the  normal  amount 
necessary  for  the  adequate  upkeep  of  the  road. 

Investment  Value. 

Save  as  to  its  large  capitalization,  the  financial  features  of 
the  Grand  Trunk  do  not  differ  greatly  from  that  of  the  typical 
American  railroad.  Its  average  operating  charges  for  three  years 
were  around  70%,  or  a  very  little  higher  than  the  average  oper- 
ating charge  of  American  roads.  Traffic  density  compared,  its 
maintenance  charges  are  at  about  an  average  figure.  The  aver- 
age rate  per  ton  mile  received  by  the  Grand  Trunk  is  around 
.67c,  very  closely  the  average  rate  for  the  United  States. 


GRAND  TRUNK  OF  CANADA  329 

From  the  table  of  earnings  given  above,  it  will  be  seen  that 
through  the  three  years  under  view  the  surplus  over  fixed  charges 
was  amply  sufficient  to  pay  the  full  4%  dividend  on  the  £8,129,- 
315  of  guaranteed  stock,  and  the  full  5%  on  £3,420,000  of  first 
preferred.  The  margin  on  the  second  preferred  was  much  nar- 
rower, exhausting  practically  all  the  surplus  for  the  calendar 
year  of  1904.  Through  the  payment  of  2%  dividends  in  1903  and 
in  1905  on  the  £7,168,055  of  third  preference  stock,  it  will  be 
seen  that  there  was  an  actual  deficit. 

The  full  dividend  on  the  guaranteed  stock  and  the  first  pref- 
erence stock  has  been  paid  since  1898,  while  small  dividends  were 
paid  on  the  second  preference  stock  from  1898  and  the  full  rates 
since  1901.  The  third  preference  stock  received  one  per  cent,  in 
1902,  2%  in  1903,  2%  each  in  1905  and  1906. 

From  all  this,  it  will  be  seen  that  the  Grand  Trunk  pursues 
the  English  policy  of  paying  out  its  entire  surplus  in  dividends 
each  year,  while  the  practice  of  almost  all  standard  American 
railroads  is  to  turn  back  somewhere  near  one-half  of  the  surplus 
into  permanent  improvements.  An  American  road  which  pur- 
sued the  English  policy  would  not  be  regarded  as  sound  and  its 
stock  would  tend  to  sell  very  much  below  that  of  other  roads 
paying"  the  same  dividend  rate. 

Let  us  bear  in  mind  that  the  Grand  Trunk's  maintenance 
charges  are  in  no  wise  excessive  and  compare  the  prices  which 
its  stocks  command  in  the  English  market.  The  lowest  price  at 
which  its  4%  guaranteed  stock  has  sold  in  four  years  was  95^ 
in  1904  and  generally  it  has  sold  above  par.  The  lowest  price  on 
the  5%  first  preference  was  97  in  1904  and  it  sold  as  high  as  122 
in  1906.  The  5%  second  preference  sold  as  high  as  115  in  1906 
and  the  third  preference  stock,  with  an  off  and  on  dividend  of 
1%  or  2%,  sold  as  high  as  70. 

With  the  exception  of  the  last,  these  are  all  fixed  dividends, 
without  prospect  of  increase.  It  is  safe  to  say  that  in  the  Ameri- 
can market  these  same  securities  would  have  sold  at  least  20% 
below  these  figures,  on  the  average,  for  it  would  be  quite  absurd 
to  compare  a  5%  stock,  for  example,  like  New  York  Central, 
carrying  control  of  a  rich  and  enormous  system  of  roads,  with 
large  equities  in  subsidiary  lines  and  no  fixture  in  its  dividend 
rate,  with  these  preference  shares  whose  rate  is  fixed  and  which 
have  no  equities  whatever. 


330  GRAND  TRUNK  OF  CANADA 

It  would  be  curious  to  determine  precisely  the  cause  of  this 
wide  discrepancy.  It  is  due,  doubtless,  first  of  all  to  the  fact,  that  the 
Grand  Trunk  is  owned  in  England  and  that  the  English  investor  is 
accustomed  to  much  smaller  returns  than  Americans;  second,  that 
the  road  is  in  the  British  possessions  and  not  in  the  United  States, 
and  third,  no  doubt,  to  a  belief  in  a  higher  standard  of  honesty  in 
English  and  colonial  managements.  But  it  is  quite  certain  that 
there  are  dozens  of  American  roads  managed  quite  as  honestly 
as  any  English  line,  whose  policy  as  to  dividend  disbursements 
is  very  much  more  conservative,  which  are  devoting  enormous 
sums  to  improvements  from  their  earnings,  and  are  therefore 
steadily  increasing  in  value;. whose  credit  is  steadily  increasing 
while  that  of  the  typical  English  railway  is  sinking  to  the  vanish- 
ing point,  and  which  offer  an  average  of  at  least  25%  higher 
returns  to  the  investor  at  the  selling  price  of  their  securities. 

There  are  very  few  American  lines  capitalized  on  any  such 
extravagant  basis  as  that  of  the  Grand  Trunk,  and  the  securities 
of  these  few  are  not  regarded  with  any  degree  of  favor. 


GRAND  TRUNK  PACIFIC  RAILWAY. 

This  quite  extraordinary  enterprise  proposes  the  construc- 
tion of  a  complete  new  transcontinental  line  from  a  point  near 
Halifax  on  the  Atlantic  to  a  port  on  the  North  Pacific.  The  main 
line  will  extend  from  Moncton,  New  Brunswick,  to  Ouebec  and 
from  there  striking  westward  in  an  almost  air  line  to  Winnipeg. 
It  will  lie  far  to  the  north  of  Montreal,  Ottawa  or  Lake  Superior, 
and  will  traverse  an  almost  wholly  undeveloped  and  uninhabited 
country.  From  Winnipeg  the  line  bears  northwesterly  to  Ed- 
monton and  from  there  by  a  route  not  yet  determined,  will  reach 
the  Pacific  coast  at  a  point  called  Prince  Rupert,  where  an  ex- 
cellent harbor  has  been  secured,  several  hundred  miles  to  the 
north  of  Vancouver.  Various  branches  are  projected,  one  of 
them  from  the  wheatfields  of  the  northwest  to  Fort  Churchill  on 
Hudson  Bay  and  another  to  Dawson  in  the  Klondike. 

The  eastern  division  from  Moncton  to  Winnipeg  is  estimated 
at  1,800  miles,  and  from  Winnipeg  to  the  coast  at  about  1,700  miles, 
or  about  3,500  miles  from  the  Atlantic  to  the  Pacific. 

The  incorporated  company  has  an  authorized  capital  of 
$45,000,000,  shares  of  par  value  of  $100  each,  of  which  all  the  $25,- 
000,000  of  common  stock  will  be  owned  by  the  Grand  Trunk 
Railway.  In  June,  1906,  $25,000,00  sterling  debenture  stock  was 
authorized,  of  which  $15,000,000  is  to  be  used  for  equipment  and 
other  purposes. 

The  construction  bonds  of  the  road  are  jointly  guaranteed 
by  the  Canadian  government  and  the  Grand  Trunk  Railway,  the 
Canadian  government  guaranteeing  3%  first  mortgage  bonds  up 
to  75%  of  the  cost  of  construction  of  the  western  division,  this 
cost  not  to  exceed  $13,000  per  mile  for  the  Prairie  section.  This 
guarantee  is  made  conditional  on  the  Grand  Trunk  Railway  of 
Canada  guaranteeing  second  mortgage  bonds  to  provide  the  bal- 
ance of  the  construction  of  the  western  division  of  the  line  from 
Winnipeg  on. 

In  1906  nearly  1,400  miles  of  the  road  was  under  construction. 

(331) 


332  GRAND  TRUNK  PACIFIC 

The  advantages  claimed  for  this  line  are  that  it  will  shorten  by 
1,500  miles  the  distance  from  New  York  to  Yokahoma  under  the 
San  Francisco  route,  and  500  miles  under  the  Canadian  Pacific 
or  Hill  route,  with  a  corresponding  shortening  of  the  distance 
from  London  or  English  ports.  It  is  being  constructed  on  a 
4-10  of  1%  grade  and  with  an  average  lower  gradient  and  curva- 
ture than  any  other  transcontinental  road. 

This  construction  forms  a  part  of  the  tremendous  railroad 
boom  which  has  been  inaugurated  in  Canada  and  which  will  add 
more  than  25%  to  the  total  mileage  of  the  dominion.  It  is  esti- 
mated that  in  1906-7  upwards  of  5,000  miles  of  track  were  under 
construction  in  Canada,  mainly  in  the  territory  lying  westward 
from  Winnipeg  to  the  base  of  the  Rockies.  This  rich  wheat- 
growing  country  has  enjoyed  an  extraordinary  prosperity, 
coupled  with  a  huge  influx  of  immigrants.  It  has  duplicated  the 
famous  Dakota  boom  of  the  '80s. 

■  It  is  to  be  noted  that  the  entire  population  of  Canada  is  less 
than  6,000,000  people,  less  than  that  of  either  the  states  of  New 
York  or  Pennsylvania.  And  yet  its  total  mileage  in  1905  was 
over  20,000  miles,  considerably  in  excess  of  the  combined  mileage 
of  these  two  rich  states.  With  the  properties  now  under  con- 
struction Canada  will  have  about  twice  the  mileage  in  proportion 
to  its  population,  as  that  of  the  United  States. 

So  far  as  the  Grand  Trunk  Pacific  is  concerned,  it  parallels, 
or  will  parallel,  especially  in  western  Canada,  the  Canadian  Pa- 
cific, the  Canadian  Northern  and  the  new  Hill  line,  from  Winne- 
peg  west. 

It  would  be  quite  extraordinary  if  the  phenomenal  prosperity 
of  western  Canada  should  not  undergo  a  severe  set-back  such  as 
always  follows  a  boom,  and  if  this  were  to  take  place  the  oper- 
ations of  the  Grand  Trunk  Pacific  might  readily  impose  for  a  time 
a  considerable  burden  on  the  parent  road.  With  its  present 
heavy  capitalization  and  high  proportion  of  fixed  charges  to  total 
net  income,  the  Grand  Trunk  is  not  in  a  position  to  meet  such  a 
burden  without  considerable  impairment  of  its  dividends. 


GREAT  NORTHERN  RAILWAY. 

The  Great  Northern  is  from  many  points  of  view  the  most 
remarkable  of  the  larger  railways  of  the  United  States,  if  not  of 
the  world.  It  is  in  a  stricter  sense  than  is  true  of  any  other  rail- 
way the  personal  creation  of  one  man.  It  was  begun  in  the  West 
when  the  West  was  new,  and  it  has  led  rather  than  followed  the 
westward  tide  of  immigration.  It  was  built  through  to  the  Pa- 
cific without  a  dollar  of  subsidy,  and  it  reached  the  coast  in  the 
panic  year  of  1893.  It  continued  to  earn  and  pay  its  5%  divi- 
dends straight  through  the  long  depression  of  1893-7,  even 
though  its  gross  earnings  per  mile  in  a  single  year  were  cut  down 
one-fourth  and  its  net  earnings  one-third ;  and  all  this  while  most 
other  Pacific  roads — the  Northern  Pacific,  the  Oregon  Naviga- 
tion, the  Union  Pacific,  the  Atchison — went  into  bankruptcy.  To 
make  the  story  still  more  wonderful,  all  the  other  Pacific  roads, 
its  direct  rival,  the  Northern  Pacific  in  particular,  received  in 
subsidies  or  land  grants  far  more  than  enough  to  have  repaid  the 
builders  every  dollar  of  actual  capital  they  expended.  The  man- 
agement, the  operation,  the  traffic  gathering  of  the  Great  North- 
ern have  for  years  been  the  model  and  the  envy  of  the  other 
railroads  of  the  country. 

The  Great  Northern  in  1906  was  operating  6,000  miles  of 
railway  between  St.  Paul,  Lake  Superior  and  Seattle,  with  very 
considerable  extensions  in  progress,  with  lines  of  steamships  on 
the  Great  Lakes,  and  across  the  Pacific.  It  had  vast  ore  properties 
in  northern  Minnesota  about  Lake  Superior  which  it  has  since 
leased  to  the  United  States  Steel  Corporation,  insuring  the 
Great  Northern,  in  freight  rates,  an  average  gross  income  as  a  mini- 
mum of  over  $8,000,000  per  year  for  at  least  eleven  years,  and 
probably  much  beyond  that.  It  had  in  addition  control  of  and  a 
half  interest  in  the  surplus  earnings  of  the  Chicago,  Burlington 
and  Quincy,  over  and  above  the  interest  on  the  bonds  issued  in 
payment  for  the  road,  estimated  at  from  two  to  four  million  dol- 
lars for  1906,  to  say  nothing  of  the  market  worth  of  this  huge 

(333) 


334  GREAT  NORTHERN 

equity.  Finally,  its  management  was  practically  identical  with 
that  of  the  Northern  Pacific,,  its  chief  rival,  affording  to  the 
Great  Northern  a  practical  monopoly  of  transportation  facilities 
over  a  vast  territory. 

As  evidence  of  the  financial  strength  of  the  company,  its 
$150,000,000  of  stock  was  selling  throughout  the  fiscal  year  of 
1906  at  above  $300  per  share  or  at  a  premium  of  over  $300,000,000 
on  its  face  value.  And  in  the  fall  of  1906  the  road  issued  to  its 
shareholders,  trust  certificates  covering  the  income  from  the  ore 
lands  lease,  to  a  face  value  of  the  entire  capital  stock  of  the  com- 
pany, and  selling  in  the  open  market  for  around  $85  per  $100 
share. 

History. 

The  Great  Northern  was  chartered  in  1889,  directly  as  the 
successor  of  the  Minneapolis  and  St.  Cloud  Railway,  but  practi- 
cally for  the  purpose  of  taking  over  the  St.  Paul,  Minneapolis  and 
Manitoba  system,  which  was  leased  to  the  Great  Northern  for 
999  years  in  1890.  The  "Manitoba"  was  in  turn  an  outgrowth  of 
the  St.  Paul  and  Pacific,  which  had  been  incorporated  as  the 
Minnesota  and  Pacific  Railroad  in  1857  to  build  a  railway  from 
St.  Paul  in  the  direction  of  the  Pacific  coast.  In  1860  the  road 
failed  to  pay  its  interest  on  advances  from  the  state  of  Minnesota 
and  it  was  for  a  time  operated  as  a  state  road,  being  then  turned 
over  to  the  St.  Paul  and  Pacific,  which  collapsed  in  1873.  Soon 
after,  Mr.  Hill  and  his  associates  obtained  the  control  of  the 
road,  after  a  long  fight  in  the  courts,  and  in  1879,  organized  the 
St.  Paul,  Minneapolis  and  Manitoba.  Soon  after  came  the 
famous  boom  of  the  early  eighties  and  the  earnings  of  the  com- 
pany were  so  enormous  that  by  1883  the  shareholders  were 
offered  $10,000,000  of  consolidated  bonds  at  the  rate  of  10%  of 
their  par  value  to  the  amount  of  one-half  of  the  holdings,  which 
was  practically  equivalent  to  a  40%  dividend ;  and  this  was  over 
and  above  an  8%  regular  dividend  in  the  same  year.  With  the 
formation  of  the  Great  Northern  Railway,  the  line  to  the  Pa- 
cific was  pushed  rapidly  and  completed  in  1893.  But  so  con- 
servatively had  the  road  been  capitalized,  especially  as  regards  the 
issue  of  bonds,  that  despite  the  drastic  depression  which  ensued, 
the  road  was  not  only  able  to  keep  out  of  the  hands  of  receivers 
but  to  continue  its  regular  5%  dividends. 

Various  lines,  like  the  Eastern  Railroad  of  Minnesota,  the 
Seattle  and  Montana,  etc.,  for  the  most  part  constructed  for  the 


GREAT  NORTHERN  335 

Great  Northern  by  subsidiary  companies,  were  added  to  the  main 
system.  The  Spokane  Falls  and  Northern  system  is  still  operated 
independently,  like  the  Minneapolis  Union  Railroad,  but  they  are 
entirely  owned  by  the  Great  Northern. 

In  1901  control  of  the  Burlington  was  purchased,  which 
practically  added  in  1906,  nearly  nine  thousand  miles  to  the 
system.  At  about  the  same  time  as  the  Burlington  purchase, 
Hill  interests  entered  the  directorate  of  the  Northern  Pacific  and 
undertook  the  management  of  that  road.  The  proposed  merger 
of  the  three  roads  through  the  formation  of  the  Northern  Securi- 
ties Company  as  a  holding  organization  of  the  controlling  shares 
of  their  stocks,  was  undertaken  in  1902,  but  soon  afterwards  dis- 
solved by  the  courts,  after  a  memorable  fight,  on  the  ground  that 
the  purpose  of  the  company  was  in  effect  the  merger  of  com- 
peting lines  of  railroad.  Mr.  Hill  retired  from  the  Northern 
Pacific  directorate  when  his  son  was  made  vice-president  of  the 
company,  but  it  is  Mr.  Hill  who  dominates  the  policy  of  the 
road. 

Ownership. 

The  Great  Northern  comes  very  near  to  being  Mr.  Hill's 
private  possession,  if  not  in  point  of  actual  ownership,  at  least  as 
regards  its  actual  management.  The  directorate  includes  Mr. 
Hill  himself,  his  son,  L.  W.  Hill,  president;  R.  I.  Far- 
rington,  second  vice-president;  Edward  Sawyer,  treasurer;  and 
Frank  E.  Ward,  general  manager ;  these  five  form  a  majority  of 
the  board.  The  other  directors  are:  Frederick  Weyerhaeuser,  at 
the  head  of  the  Weyerhaeuser  lumber  interests  and  long  identi- 
fied with  the  road,  also  a  director  in  the  Chicago  Great  Western ; 
Henry  W.  Cannon,  formerly  president,  now  chairman  of  the 
board  of  the  Chase  National  Bank,  president  of  the  Pacific  Coast 
Company,  controlling  a  large  line  of  Pacific  coast  steamships; 
Samuel  N.  Thorne,  a  director  of  the  Central  Trust  Company  of 
New  York,  and  in  other  enterprises ;  and  William  B.  Dean,  of  St. 
Paul.  The  number  of  stockholders  of  the  road  is  not  reported,  but 
it  is  not  large.  The  Hill  lines  work  in  close  association  with  the 
Morgan  interests,  which  are  prominent  in  the  directorate  of  the 
Northern  Pacific,  and  Mr.  Hill  has  been  a  director  in  the  Erie 
road,  also  largely  dominated  by  Morgan  interests.  His  resig- 
nation in  1906  was  not  accepted.  Through  the  lease  of  its  ore 
lands    the    Great    Northern    has    recently    come    into    close   associ- 


336  GREAT  NORTHERN 

ation  with  the  United  States  Steel  Corporation,  in  which  Morgan 
interests  are  likewise  influential. 

By  a  curious  coincidence  Mr.  Hill  was  born  in  Canada  and 
became  head  of  one  of  the  greatest  railroad  systems  in  the 
United  States,  just  as  both  Sir  William  Van  Home  and  Sir 
Thomas  Shaughnessy  were  born  in  Illinois  and  became  heads  of 
the  greatest  railroad  system  in  Canada.  Mr.  Hill  had  accumu- 
lated a  considerable  fortune  in  the  boating  and  transportation 
interests  about  St.  Paul  before  entering  railroading,  in  this  re- 
gard following  the  career  of  Commodore  Vanderbilt.  He  was 
first  local  agent  of  the  St.  Paul  and  Pacific  Railway  at  St.  Paul, 
and  in  1879  was  made  general  manager,  and  in  1881  vice-presi- 
dent of  the  newly  organized  St.  Paul,  Minneapolis  and  Manitoba. 
In  1883  he  was  made  president  of  that  road  and  has  since  con- 
tinued. He  developed  a  marvellous  aptitude  for  railroad  man- 
agement, and  was  the  pioneer  in  the  policy  of  full  cars  and  heavy 
trainloads,  which  has  subsequently  worked  so  enormous  a  re- 
duction in  the  transportation  costs  of  the  country.  It  is  worthy 
of  note  that  when  it  was  proposed  to  push  the  railroad  through 
to  the  Pacific  without  subsidies  or  land  grants,  through  a 
wholly  unsettled  country  and  along  the  extreme  northern  line  of 
the  United  States  the  enterprise  was  popularly  known  as  "Hill's 
Folly."  So  did  his  genius  for  transportation  triumph  however, 
that  when  the  Northern  Pacific  and  other  roads  went  into  bank- 
ruptcy, Mr.  Hill  was  able  to  keep  his  road  on  its  feet,  sheerly 
through  its  larger  earnings  per  train  mile,  and  its  low  fixed 
charges.  His  genius  is  shown  equally  in  matters  of  railroad 
finance.  It  was  his  foresight  and  sagacity  which  bought  up  the 
rich  iron  deposits  of  northeastern  Minnesota,  today  of  actual  or 
potential  value  sufficient  to  retire  the  entire  outstanding  capital- 
ization of  the  Great  Northern  system  and  leave  a  huge  surplus 
besides.  Similarly,  his  remarkable  judgment  was  shown  in  the 
purchase  of  the  Burlington  road  when  $200  a  share  was  paid  for 
its  stock.  He  is  almost  as  well  known  in  Europe  as  in  America 
and  it  is  notable  that  the  financing  of  the  Hill  roads  has  never 
been  with  the  aid  of  underwriting  syndicates. 

Capitalization. 

It  is  quite  impossible  from  the  Great  Northern's  reports  to 
make  up  an  estimate  of  its  capitalization  on  the  same  basis  as 
with  other  roads.     The  reports  are  not  designed  to  give  a  great 


GREAT  NORTHERN  337 

deal  of  information,  and  were  it  not  for  the  magnificent  record 
which  the  management  has  made,  they  would  produce  a  very 
unfavorable  impression. 

On  June  30th,  1906,  the  nominal  capitalization  of  the  system 
was  as  follows : 

Capital   stock $149,546,050 

Funded  debt •  • 100,227,939 

St.  Paul,  Minn.  &  Man 347,000 

Total  capital $250,120,989 

Approx.  gross  capit.  per  mile $42,362 

Average  miles  operated 5,906 

Net  earnings  on  gross  capitalization.  .  10.1% 

Stock  on  total  capitalization 60% 

Fixed  Charges  on  Total  Net  Income . .  26% 

Factor  of  Safety 74% 


The  showing  given  above  is  the  gross  capitalization ;  the 
actual  capitalization  was  considerably  less.  For  example,  some 
years  ago  the  Great  Northern  transferred  to  the  Lake  Superior 
Company  Ltd.,  all  its  ore  lands,  its  interest  in  the  Great  Northern 
Express  Company  and  some  miscellaneous  holdings.  It  was  the 
ore  lands  held  by  this  latter  company  which  formed  the  basis 
of  the  issue  to  Great  Northern  stockholders  in  1906  of  ore 
certificates  to  a  par  value  of  $150,000,000.  Of  all  this,  or  of  the 
earnings  of  the  company,  or  even  that  such  a  company  exists, 
the  Great  Northern's  report  of  1906  did  not  give  the  remotest 
hint. 

Taking  the  ore  certificates  alone,  these  sold  at  from  $85  to 
$50  per  $100  share  in  1906-7.  Averaging  these  at  $75  per  share, 
this  represented  the  cash  equivalent  of  three-quarters  of  all  the 
Great  Northern's  stock  and  nearly  one-half  of  the  gross  capitali- 
zation of  the  road. 

Since  this  distribution,  however,  which  was  virtually  equiva- 
lent to  a  stock  dividend  of  75%  and  more,  the  Great  Northern's 
capitalization  must  stand  on  its  own  legs ;  that  is,  the  purchaser 
of  Great  Northern  stock  now  has  no  interest  in  the  ore  properties 
beyond  the  coal  traffic  which  they  will  furnish  to  the  railroad 
proper. 

22 


338  GREAT  NORTHERN 

Probably  the  remaining  holdings  of  the  Lake  Superior  Com- 
pany Ltd.,  and  the  other  outside  holdings  of  the  Great  Northern 
would  not  very  greatly  reduce  its  capital,  so  that  the  estimate 
of  $250,000,000  is  somewhere  near  the  actual  capitalization  of 
the  railway,  that  is,  what  has  been  spoken  of  in  considering  other 
companies  as  the  net  capitalization. 

Even  on  this  basis,  it  is  evident  from  the  showing  of  the 
net  earnings  that  the  Great  Northern's  capitalization  is  low.  It 
is  true  that  the  net  earnings  shown  are  on  a  basis  of  rather 
low  maintenance  charges,  so  that  in  strict  comparison  with  other 
roads,  the  10.1%  shown  in  1906  would  be  slightly  reduced.  As 
it  is,  it  stands  against  8%  for  the  Union  Pacific,  9.6%  for  the 
Northern  Pacific,  9.4%  for  the  Canadian  Pacific,  5.9%  for  the 
Atchison,  6.6%  for  the  Southern  Pacific. 

Again,  the  estimate  of  a  capitalization  of  $42,362  per  mile 
for  the  Great  Northern  stands  against  similar  estimates  of  $59,- 
512  for  the  Northern  Pacific,  $58,887  for  the  Atchison,  $28,613  for 
the  Canadian  Pacific,  $64,426  for  the  Southern  Pacific,  and  an 
actual  net  capitalization  of  the  Union  Pacific  of  about  $50,000 
(nominal  $73,992). 

It  will  be  seen  that  the  amount  of  bonds  of  the  Great  North- 
ern is  relatively  low,  amounting  to  an  average  of  only  about 
$17,000  per  mile,  the  stock  representing  60%  of  the  gross  capi- 
talization and  fixed  charges  consuming  only  26%  of  the  total  net 
income.  Only  a  few  of  the  strongest  roads  in  the  country,  like 
the  Lackawanna,  are  able  to  make  any  such  showing  as  this.  It 
is  evident  enough  that  earning  as  it  does,  around  13%  a  year  on 
its  150  millions  of  stock,  the  security  of  the  underlying  bonds  of 
the  Great  Northern  would  never  be  questioned.  The  nominal 
Factor  of  Safety  is  74%  ;  actually  it  is  nearer  100%. 

Equities  Owned. 

As  to  the  value  of  the  Lake  Superior  Company,  Ltd.,  all 
of  which  is  owned  by  the  Great  Northern,  no  information  is  fur- 
nished by  the  reports  and  none  is  forthcoming.  Now  that  the  ore 
holdings  have  been  transferred  to  a  separate  set  of  trustees,  the 
chief  element  of  value  in  this  asset  has  been  eliminated.  Though 
it  may  still  be  considerable,  it  does  not  compare  witli  the  Great 
Northern's  other  equity  in  the  Burlington. 

For  a  number  of  years  the  Burlington  has  been  charging  im- 
provements to  operating  expenses,  the  amount  of  surcharge  in 


GREAT  NORTHERN  339 

1906  probably  being  in  the  neighborhood  of  eight  or  nine  million 
dollars.  Estimating  that  the  half  of  this  would  be  equivalent  to 
similar  expenditures  on  other  lines  in  the  same  territory,  there  would 
still  remain  a  concealed  surplus  of  at  least  four  million  dollars, 
half  of  which  might  have  been  claimed  by  the  Great  Northern. 
It  is  obvious,  therefore,  that  the  Great  Northern  has  here  an 
equity  worth  perhaps  twenty  to  thirty  millions  and  that  in  time  of 
need  it  could,  since  its  control  of  the  Burlington  is  complete,  add 
from  one  to  two  million  dollars  annually  to  its  net  income,  at 
will. 

The  Great  Northern  has  no  such  large  land  holdings  as,  for 
example,  the  Canadian  Pacific  and  others  but  it  has  several 
hundred  thousand  acres  from  old  land  grants  still  remaining  un- 
sold and  its  cash  receipts  from  this  department  in  1906  were 
$600,000. 

The  Ore  Lands  Contract. 

In  1906  the  Great  Northern,  through  its  representatives, 
contracted  with  the  United  States  Steel  Corporation  for  ex- 
clusive rights  to  mine  its  great  bodies  of  ore  in  northeastern 
Minnesota,  on  a  royalty  basis.  The  price  to  be  paid  was  $1.65  per 
ton,  delivered  at  the  upper  Lake  docks,  with  an  increase  of  3.4 
cents  per  ton  through  each  succeeding  year.  The  minimum  agreed 
to  be  mined  is  750,000  tons  for  the  year  of  1907,  and  increasing  by 
an  equal  amount  each  year  until  the  output  reaches  8,250,000  tons  per 
annum,  continuing  thereafter,  on  this  basis.  The  maximum  out- 
put provided  for  in  the  contract  would  be  reached  in  the  year 
1917.  In  this  year  the  Steel  Corporation  will  be  paying  $1.99  per 
ton  for  the  ore,  involving  a  total  royalty  of  $16,500,000  per  year. 
Needless  to  say,  these  are  the  minimum  figures  and  it  is  expected 
that  the  actual  output  will  be  considerably  exceeded.  The  contract 
is  to  run  indefinitely,  unless  terminated,  at  the  option  of  the  Steel 
Corporation  Jan.  1,  1915,  two  years  notice  to  be  given. 

It  is  computed  that  there  are  upwards  of  400,000,000  tons 
of  iron  ore  covered  by  this  contract,  more  optimistic  figures 
being  much  higher  even  than  this.  It  is  easy  to  see,  therefore, 
that  unless  the  minimum  out-take  provided  for  be  enormously 
exceeded,  the  life  of  these  mines  would  extend  over  a  long  period. 
Subsequent  to  this  contract,  these  ore  bodies  were  transferred 
from  the  holding  company,  the  Lake  Superior  Co.,  Ltd.,  to  three 
trustees,  consisting  of  President  Hill  and  his  two  sons,  James  N. 


340 


GREAT  NORTHERN 


and  Walter  J.  Hill,  to  be  held  by  them  in  trust  and  for  the  benefit 
of  the  shareholders  of  the  Great  Northern  Railway.  To  the 
shareholders  were  issued  Ore  Certificates,  so  called,  to  the  par 
value  of  their  holdings  of  Great  Northern  stock,  so  that,  sup- 
posing these  certificates  were  worth  par,  this  was  equivalent  to 
a  100%  stock  dividend. 

But  aside  from  the  proceeds  from  the  ore  certificates,  Great 
Northern  proper  will  derive  a  considerable  direct  benefit  from 
the  haul  of  the  ore  from  the  mine  mouth  to  the  docks.  At  the 
present  time  it  is  estimated  that  this  traffic  amounts  to  in  the 
neighborhood  of  five  or  six  million  tons  annually;  under  terms 
of  contract  it  will  be  seven  and  one-half  millions  the  first  year, 
with  the  addition  of  as  much  more  in  each  succeeding  year,  for 
eleven  years.  This  in  itself  will  go  far  towards  swelling  the 
profits  of  the  company. 

Increase   of   Capitalization. 

Since  1900,  the  Great  Northern  has  added  about  $55,000,000 
to  its  gross  capitalization,  almost  the  entire  amount  of  the  in- 
crease being  in  stock.  Less  than  $4,000,000  has  been  added  to 
its  already  very  low  bonded  debt.  The  total  increase  amounted 
to  a  little  over  a  quarter  of  the  gross  capitalization,  while  gross 
e3rnings  in  the  same  period  almost  doubled.  The  various  item^ 
compare  as  follows : 


Year 

Common  Stock 

Funded  Debt 

Total 

Gross  Earnings 

1900 

1006 

$  98,413,500 
149,546,050 

$  96,753,697 
100,227,939 

$195,167,197 
249,773,983 

$28,910*789 
51,276,280 

Increase  over  six  vears :  Total  capital,  28%  ;  gross  earnings, 
77%. 

At  the  close  of  1906,  the  Great  Northern  offered  to  its  share- 
holders $60,000,000  of  new  stock  at  par,  which  meant  to  the 
extent  of  40%  of  their  holdings;  payments  of  the  same  to  be 
extended  over  a  period  of  two  years. 

Character  of  Traffic. 

The  Great  Northern  reports  have  never  been  lavish  in  the 
amount  of  information  they  afford  and  among  other  items  usually 
reported,  it  does  not  give  the  character  of  its  tonnage.     When 


GREAT  NORTHERN 


341 


the  road  was  completed  to  the  Pacific  an  enormous  lumber  trade 
was  developed  and  in  order  to  fill  the  westbound  cars,  the  cotton 
trade  and  other  merchandizing-  with  Asian  ports  was  energetically 
stimulated.  In  1900  a  steamship  line  to  the  Orient  was  organized 
for  the  purpose  of  still  farther  developing  this  trade.  The  ore 
carriage  of  the  Great  Northern  to  Lake  Superior  is  also  very 
heavy,  although  the  haulage  is  short.  In  other  words,  in  addition 
to  the  grain  traffic,  which  would  otherwise  be  the  mainstay  of 
the  Great  Northern,  a  wide  variety  of  other  tonnage  has  been 
gathered  with  quite  extraordinary  assiduity,  so  that  despite  its 
peculiar  situation,  the  traffic  of  the  Great  Northern  is  probably 
as  widely  distributed  as  that  of  any  railroad  in  the  country.  So 
important  indeed  has  this  ownership  of  ore  lands  become  that  a 
series  of  bad  years  such  as  the  Great  Northern's  territory  suf- 
fered after  the  collapse  of  the  boom  of  the  '80's  might  come  now 
without  affecting  in  any  similar  way  the  prosperity  of  the  road. 

Stability  of  Earnings. 

From  the  bedrock  year  of  1896,  the  mileage  and  earnings  of 
the  system,  including  the  Montana  Central,  the  Willmar  and 
Sioux  Falls,  and  the  Duluth,  Watertown  and  Pacific,  this  being 
known  as  the  railway  system  proper,  but  not  including  the 
Spokane  Falls  and  Northern,  the  Minneapolis  Union  Railway, 
the  Minneapolis  Western  Railway,  and  the  Duluth  Terminal, 
operated  separately,  have  been  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896-7 

4,415 

$19,436,061 

$4,402 

1897-8 

4,466 

22,577,544 

5,055 

1898-9 

4,786 

25,017,904 

5,227 

1899-0 

5,076 

28,910,789 

5,695 

1900-1 

5,202 

28,350,690 

5,450 

1S01-2 

•V249 

36,032,256 

6,864 

1902-3 

5,490 

40,785,647 

7,429 

1903-4 

5,623 

40,057,353 

7,124 

1904-5 

5,723 

43,526,088 

7,605 

1905-6 

5,906 

51,276,280 

8,681 

It  will  be  seen  that  with  an  increase  of  less  than  40%  in 
mileage,  the  earnings  of  the  system  have  risen  from  $19,000,000 
in  1897,  to  over  $51,000,000  in  1906.  In  other  words  the  gross 
earnings  per  mile  within  this  period  have  more  than  doubled. 
The  gross  earnings  of  the  four  roads  noted  above  as  operated 
separately,  swelled  the  earnings  of  the  Great  Northern  lines  to 
$53,000,000  in  1906. 


342  GREAT  NORTHERN 

Mr.  Hill  has  pointed  out  that  this  enormous  increase  in 
earnings  on  the  Great  Northern  has  not  been  derived  as  on  so 
many  eastern  roads,  as  for  example  the  Pennsylvania,  the  Balti- 
more and  Ohio,  etc.,  from  a  heavy  increase  of  freight  rates,  but  on 
the  contrary  in  the  face  of  a  heavy  reduction.  The  report  for 
1905  prints  a  very  interesting  table  showing  the  reduction  in 
the  average  rate  per  ton-mile  for  a  quarter  of  a  century.  It  was 
as  follows : 

1881 2.88c. 

1890 1.25c. 

1900 89c. 

1905 79c. 

In  the  meantime  the  number  of  revenue  tons  hauled  one 
mile  had  risen  from  93,000,000  to  4,170,000,000;  and  the  report 
points  out  that  had  the  tonnage  of  1905  been  carried  at  the  rates 
of  1881,  the  freight  revenue  received  would  have  amounted  to 
$120,000,000  as  against  $33,000,000  actual.  In  other  words  the 
freight  rates  had  been  cut  down  more  than  70%  within  25  years ; 
and  Mr.  Hill's  policy  has  been  to  promote  as  steady  a  reduction 
in  rates  as  the  business  conditions  would  permit.  The  intent 
of  the  new  low  grade  road  from  Spokane  Falls  to  Portland  is 
to  provide  the  Hill  lines  with  a  western  outlet  through  which 
freight  can  be  carried  at  a  minimum  charge ;  and  as  the  part  of 
the  Great  Northern  from  Spokane  to  the  coast  was  that  involving 
the  heaviest  grades,  and  the  greatest  expense,  the  new  line  is 
expected  to  make  the  road  practically  impregnable  in  its  ability 
to  make  low  through  transcontinental  rates. 

Maintenance. 

One  very  remarkable  achievement  of  the  Great  Northern  ha:-: 
been  an  "operating  ratio"  of  50%,  in  the  face  of  a  general  average 
of  about  69%  for  the  whole  country,  and  a  matter  of  70%  to 
75%  on  many  prosperous  roads.  This  extraordinary  low  ratio 
of  running  expenses  to  earnings  has  been  skeptically  looked  upon 
by  many  as  "mere  bookkeeping."  It  is  forgotten  that  most  rail- 
way statistics  outside  of  gross  earnings  and  actual  interest  and 
rental  charges  are  mere  bookkeeping,  and  that  the  Great  Northern 
is  not  alone  in  charging  only  its  actual  necessities  under  the  item 
of  maintenance,  and  then  devoting  large  sums  from  surplus  to 
improvements.       But   it    is  partly   in   this   way   that   the   operating 


GREAT  NORTHERN 


343 


ratio  of  the  Great  Northern  has  been  kept  down  to  its  remarkable 
figure.  The  maintenance  charges  for  the  road  for  a  period  of 
six  years  have  been  as  follows : 


Maintenance  per  Mile 

Year 

Traffic  Density 

Total 

Way 

Equipment 

1900-1 

477  ,076 

$846 

$452 

$1  ,298 

1901-2 

607  ,776 

985 

519 

1,504 

1902-3 

656 ,982 

960 

566 

1,526 

1903-4 

596  ,088 

904 

559 

1,463 

1904-5 

728,666 

973 

655 

1,628 

1905-6 

835  ,342 

1,092 

816 
$594 

1 ,908  ! 

Average 

650,321 

$960 

$1  ,554 

Can.  Pac 

458,589 

850 

1,002 

1,852 

Nor.  Pac 

729,102 

1,300 

791 

2,091 

Union  Pac. . . . 

739  ,206 

1,173 

1,049 

2,222 

Atch 

577  ,005 

1,123 

1,113 

2,236 

Sou.  Pac 

594  ,848 

1  ,446 

1,246 

2,692 

Burlington 

580  ,024 

1,104 

1,032 

2,136 

It  is  to  be  remembered  that  the  Great  Northern's  passenger 
service  contributes  less  than  20%  to  the  gross  earnings,  though 
the  Northern  Pacific,  for  example,  was  a  little  higher  in  this 
regard.  Bearing  this  in  mind,  it  will  be  seen  that  with  a  traffic 
density  considerably  higher  than  that  of  the  Atchison,  the  South- 
ern Pacific  or  the  Burlington,  the  Great  Northern  expended  for 
maintenance  on  the  average  from  $600  to  $1,000  per  mile  less. 
On  nearly  6,000  miles  of  railroad,  this  would  have  meant  a  differ- 
ence in  the  surplus  shown  by  the  Great  Northern  of  from  three 
and  a  half  to  six  million  dollars  per  year,  on  the  average;  or 
conversely,  had  the  Atchison  and  other  roads  kept  their  main- 
tenance charges  down  in  the  same  way  their  surpluses  would 
have  been  over  $5,000,000  per  year  larger  for  the  Atchison, 
$9,000,000  for  the  Southern  Pacific  and  perhaps  $5,000,000  for  the 
Burlington. 

The  Northern  Pacific  traffic  density  was  somewhat  higher 
than  that  of  the  Great  Northern,  but  its  average  maintenance 
charges  were  also  $500  per  mile  higher.  Even  the  Canadian 
Pacific,  with  a  traffic  density  one-third  less,  stands  on  the 
average  at  $300  per  mile  more  than  the  Great  Northern,  a 
difference  which  would  have  swelled  its  surplus  by  two  and  a 
half  million  dollars  per  year. 

The  year  1906  saw  no  change  in  this  quite  extraordinary 
difference  in  maintenance  charges  between  the  Great  Northern 


344 


GREAT  NORTHERN 


and    all    its    rivals,    and    the    following   table    is    of    quite    striking 
interest : 


Traffic  Density 

Way 

Equipment 

Total 

Northern  Pacific 

Atchison 

971 ,344 
693  ,873 
713,568 
678  ,554 
990,815 
835,342 

$1  ,387 
1,479 
1,271 
1,775 
1  ,519 
1,092 

$1 ,098 
1,271 
1,533 
1,554 
1,222 
816 

$2,485 
2,750 

Burlington 

2,804 

Southern  Pacific 

Union  Pacific 

Great  Northern 

3,329 
2,741 
1,908 

It  will  be  seen  from  the  above,  that  the  nominal  expenditures 
of  the  Great  Northern,  on  a  much  higher  traffic  density,  were 
$850  per  mile  less  than  the  Atchison,  and  $1,400  per  mile  less  than 
the  Southern  Pacific.  In  other  words,  had  the  Great  Northern's 
maintenance  charges  been  on  an  Atchison  basis,  its  nominal 
surplus  would  have  been  $5,000,000  less  than  it  was,  and  on  a 
Southern  Pacific  basis  $8,000,000  less;  or  on  a  Great  Northern 
basis  the  Atchison  surplus  would  have  been  $6,000,000  more  than 
it  was  for  1906,  and  the  Southern  Pacific's  surplus  would  have 
been  $10,000,000  or  $12,000,000  more. 

The  character  of  the  Pacific  roads  is,  broadly  speaking,  much 
the  same.  At  least  such  difference  as  exists  would  in  no  wise 
account  for  this  wide  disparity  of  maintenance  charges. 

This  disparity  helps  to  account  for  the  fact  that  the  Great 
Northern  showed  a  50%  "operating  ratio",  while  the  Atchison's 
was  62%  and  the  Southern  Pacific's,  64%. 

Improvements  from  Earnings. 

This  economy  in  maintenance  charges,  however,  has  been  to 
a  large  extent  made  up  by  very  heavy  appropriations  from  earn- 
ings for  permanent  improvements  and  renewals.  The  appro- 
priations from  1898  compare  as  follows : 

1897-8 $2,250,000 

1898-9 1,800,000 

1899-0 1,800,000 

1901-2 2,000,000 

1902-3 3,000,000 

1903-4 2,000,000 

1904-5 3,000,000 

1905-6 5,130,910 


Total $20,980,910 


GREAT  NORTHERN 


345 


It  will  be  seen  that  in  1906  the  special  appropriations  added 
about  50%  to  the  actual  expenditures  for  maintenance,  which 
totalled  a  little  over  $10,000,000  for  the  year. 

But  the  Great  Northern  has  not  been  extraordinary.  Within 
the  same  period  the  Northern  Pacific,  with  an  average  expendi- 
ture of  maintenance  nearly  one  third  higher  than  the  Great  North- 
ern has  set  aside  $26,081,000  for  improvements;  the  Atchison 
from  1901,  $15,859,000;  the  Union  Pacific,  $19,885,775. 

It  will  be  seen  that  the  Great  Northern's  appropriations  of 
surplus  have  not  been  much  larger  than  those  of  other  roads  of 
a  similar  type,  so  that  the  difference  of  its  maintenance  charges 
from  other  roads  still  remains  and  would  operate  considerably 
to  reduce  the  large  nominal  surplus  which  it  has  shown  within 
recent  years. 

Surplus   Earnings. 

It  should  be  understood  that  the  items  of  surplus  shown  be- 
low are  not  those  given  in  the  Great  Northern  reports,  since  in 
the  make-up  of  the  road's  income  account,  the  total  income  shown, 
i.  e.,  the  surplus,  is  after  charging  off  special  appropriations  for 
renewals  and  improvements  instead  of  before  as  is  the  usual 
practice  in  railroad  reports.  So,  for  example,  in  the  report  for 
1906,  the  surplus  shown  before  payments  of  dividends  is  $5,- 
130,910  less  than  the  amount  shown  in  the  table  below,  and  as 
much  less  in  each  of  the  previous  years  as  the  appropriations 
given  in  the  table  above. 

The  comparison  on  the  uniform  basis  adopted  in  this  book, 
is  as  follows : 


Year 


Per  cent. 

Earned  on 

Stock 


Dividend 

Paid  on 

Stock 


Average 
Price 


1900-1 $9,388,982 

1901-2 14,526,521 

1902-3 15,496,022 

1903-4 14,171,678 

1904-5 16,587,643 

1905-6 19,984,915 


192 
188 
189 
187 
291 
312 


Dividend  Record. 

Nominally    the    dividends    shown    since    the    organization    of 
the  St.  Paul,  Minneapolis  and  Manitoba  have  been  as  follows: 


346  GREAT  NORTHERN 

Year.  Manitoba. 

1881 3 

1882 9 

1883 8 

1884 7^ 

1885-1906 6 

Gt.  Nor. 

1890 1 

1891 4y4 

1892-6 5 

1897 sy2 

1898 6j/4 

1899-1907 7 

As  a  matter  of  fact,  the  dividends  shown  above  reflect  but 
the  minor  part  of  the  actual  returns  received  by  Great  Northern 
stockholders.  The  Great  Northern  is  one  of  the  roads  which 
have  from  time  to  time  given  its  shareholders  very  valuable 
rights.  Mention  has  already  been  made,  for  example,  of  the 
offering  of  bonds  in  1883  which  amounted  to  a  40%  dividend. 
The  Great  Northern  was  organized  in  1889,  and  in  the  seventeen 
intervening  years  the  company  has  increased  its  capital  stock 
from  twenty  million  dollars  to  one  hundred  and  fifty  millions, 
of  which  all  but  twenty-five  million  dollars  has  been  sold  to  the 
stockholders  at  par  or  less. 

The  amount  of  these  stock  offerings,  the  percentage  to 
which  each  subscriber  might  add  to  his  holdings,  the  market 
price  at  the  time  of  the  offerings,  and  the  market  value  of  the 
rights  have  been  as  follows : 


Year 

Amount 

Per  Cent. 

Market            Value  of 
Price               Rights 

1905 

$25,000,000 
25,000,000 

9,000,000 
15,000,000 
25,000,000 

5,000,000 

20 
25 
10 
20 
100 
25 

320 
200 
170 
190 

38 

1901 

24 

1900 

60 

1899 

14 

1898 

176                  *108 

1893    . 

120 

5 

-Stock  dividend  included. 

In  1898  the  stock  of  the  Seattle  &  Montana  Railway,  a  sub- 
sidiary company,  was  distributed  to  the  shareholders  to  the  ex- 


GREAT  NORTHERN  347 

tent  of  50%  of  their  holdings  and  this  stock  was  then  exchanged 
to  80%  of  its  par  value  for  Great  Northern  stock.  The  latter  was 
selling  then  at  the  lowest  at  $125  per  share.  This  was  equivalent 
to  a  cash  dividend  of  50%,  which  added  to  $58  cash  value  of  the 
subscription  rights  for  that  year,  made  the  total  extra  divi- 
dends for  the  year  amount  to  at  least  $108. 

From  all  this  it  will  be  seen  that  had  the  original  shareholder 
in  the  Great  Northern  from  1889  systematically  sold  his  rights, 
he  would  have  received  in  addition  to  86%  in  dividends,  at  the 
least  215%  in  cash  value  of  his  rights.  That  is,  the  value  of  the 
rights  averaged  very  nearly  12.5%  a  year. 

Had  the  rights  not  been  sold,  but  taken  up  by  the  share- 
holders themselves,  it  has  been  estimated  that  the  original  share- 
holder of  1889  who  still  held  in  1906  all  the  stock  he  had  sub- 
scribed for  would  have  had  at  1906  prices,  a  profit  of  about  900%. 

At  the  close  of  1906  the  shareholders  were  offered  new  stock 
to  the  extent  of  40%  of  their  holdings  at  par.  The  stock  was 
then  selling,  ex-ore  certificates,  at  around  $230  per  share,  at 
which  figure  the  rights  were  worth  around  $40.  Owing  to  the 
litigation,  instigated  by  the  State  of  Minnesota,  the  share  issue 
was  held  over  and  in  the  meantime  the  stock  slumped  violently 
to  around  $126  per  share,  at  which  figure  the  cash  value  of  the 
rights  was  worth  less  than  a  quarter  as  much. 

Very  plainly  the  Great  Northern  road  has  been  managed  for 
the  benefit  of  all  its  shareholders  and  not  simply  that  of  a  few  in- 
siders. Probably  it  is  this  fact,  which,  in  connection  with  the 
great  value  of  its  leases,  has  given  so  high  a  premium  to  Great 
Northern  stock. 

The  Balance  Sheet. 

As  further  evidencing  the  financial  strength  of  the  road, 
the  balance  sheet  of  June  30,  1906,  showed: 

Current   assets  of $23,266,493 

Current     liabilities 6,690,100 

Deferred     liabilities. 1,082,519—     7,772,619 

Leaving  a  working  balance  of $15,493,874 

There  was  an  aggregate  item  of  cash  on  hand  of  $13,783,808. 


348  GREAT  NORTHERN 

It  is  to  be  noted  that  among  the  items  of  "Contingent 
Liabilities,  renewal  funds,  etc.,"  there  were  surplus  funds  of 
proprietory  companies  deposited  with  the  Great  Northern  Rail- 
way Company  of  $9,172,469.  Probably  a  considerable  portion 
of  this  represents  the  accumulated  surplus  of  the  Lake  Superior 
Company. 

The  total  credit  balance  to  Profit  and  Loss  of  the  Great 
Northern  and  its  proprietary  companies  in  1906  was  $27,603,558. 

Land  Department. 

The  land  grants  inherited  by  the  company  from  its  pre- 
decessors amounted  to  a  net  total  of  somewhat  over  800,000 
acres,  which  further  adjustments  with  the  government  will  re- 
duce to  less  than  200,000  acres,  remaining  unsold.  During  the 
year  of  1906,  3,270  acres  were  sold  at  an  average  of  $9.81  per 
acre. 

On  this  basis  the  remainder  of  the  Great  Northern's  land 
grants  might  be  estimated  as  worth  between  one  and  two  million 
dollars. 

Extensions. 

Jointly  with  the  Northern  Pacific,  the  Great  Northern  is 
building  a  new  line  from  Portland  and  Vancouver  into  Spokane 
and  Eastern  Washington.  It  is  quite  characteristic  of  the  Great 
Northern's  reports  that  neither  that  for  1905  nor  for  1906  contains 
a  line  of  mention  of  this  important  project.  It  is  referred  to 
briefly  in  the  reports  of  the  Northern  Pacific.  The  line  is  known 
as  the  Portland  &  Seattle  Railway  Company  and  follows  the 
north  bank  of  the  Columbia  River  and  will  be  very  nearly  a 
water  grade  line.  It  is  one  of  the  most  expensive  pieces  of  first 
construction  in  western  railroading  and  is  estimated  to  cost 
upwards  of  $30,000,000;  that  is,  $60,000  to  $70,000  per  mile  for 
423  miles  of  line. 

The  importance  of  this  new  line  lies  in  the  fact  that  it  will 
provide  the  two  sponsor  roads  with  transcontinental  lines  cross- 
ing but  a  single  mountain  range ;  that  is  to  say,  it  will  cut  out 
the  crossing  of  the  Cascades  in  Washington.  No  other  trans- 
continental line  will  have  less  than  three  range  crossings.  It 
is  a  part  of  the  scheme  outlined  by  President  Hill  in  a  speech 
sometime  ago  in  Spokane,  wherein  he  said  that  by  the  time 
the  Panama  Canal  was  completed,  his  lines  would  have  a  freight 


GREAT  NORTHERN  349 

way  across   the  continent,  carrying  traffic   so  cheaply   that   lily 
pads  would  grow  in  the  canal. 

This  line  is  of  especial  interest,  too,  in  considering  the  in- 
vasion of  the  Great  Northern-Northern  Pacific  territory  by  the 
new  extension  of  the  St.  Paul  to  the  coast.  Against  the  single 
range  which  the  Hill  lines  will  then  cross,  the  St.  Paul  will  cross 
four. 

In  addition  to  all  this,  President  Hill  has  outlined  an  am- 
bitious project  for  the  extension  of  the  Great  Northern  into  Canada, 
amounting  practically  to  the  construction  of  a  new  trunk  line 
from  Winnipeg  west,  probably  to  the  base  of  the  Rocky  Moun- 
tains and  lying  between  the  Canadian  Pacific  and  Canadian 
Northern  lines.  This  is  the  same  great  territory  that  will  be 
crossed  by  the  new  Grand  Trunk  Pacific,  so  that  when  all  the 
new  construction  under  way  or  projected  for  the  Canadian  North- 
west is  completed,  it  will  have  four  great  trunk  lines  instead  of 
one,  as  at  present. 

It  is  fairly  clear  that  President  Hill  means  to  make  these 
extensions  tributary  to  the  main  system,  and  doubtless  to  his 
steamship  lines  on  the  Great  Lakes.  This  Canadian  territory 
has  been  enjoying  a  tremendous  boom  within  the  past  few  years, 
in  almost  every  respect  paralleling  the  famous  Dakota  boom  of 
the  '80s.  Millions  of  home  seekers  have  gone  into  this  far 
northern  country  to  take  up  the  rich  wheat  fields  it  contains, 
and  it  is  estimated  that  to  keep  up  with,  and  further  to  stimulate, 
this  immense  tide  of  immigration,  some  5,000  miles  of  railway 
are  planned  and  building.  In  the  natural  business  cycle  it  seems 
almost  certain  that  a  reaction  will  set  in,  but  so  far  as  the  Great 
Northern  is  concerned,  it  is  to  be  noted  first  of  all  that  Presi- 
dent Hill  has  already  built  one  road,  a  transcontinental  road  at 
that,  and  carried  it  successfully  through  the  heaviest  depression 
this  country  has  known  since  73-77;  further,  that  this  reaction 
may  come  before  the  lines  are  completed  and  that  they  mav 
not  be  built  as  rapidly  as  contemplated. 

It  is  significant  of  the  Hill  policy  that  all  these  Great  North- 
ern extensions  are  being  made  without  a  dollar  of  subsidy  or  a 
dollar  of  bonds ;  that  is,  wholly  through  stock  issues. 

Beyond   all   this,   the    Great   Northern   has   a   line   which    is 
pushing  through  Western  Nebraska  from  Sioux  City  with  nomj 
nal  objective  in  Denver,  thus  invading  distinctively  Union  Pacific 


350  GREAT  NORTHERN 

territory.     Other  smaller  constructions  arc  constantly  adding  to 
its  mileage. 

Investment   Value. 

It  is  obvious  from  what  has  preceded  that  Great  Northern 
is  a  stock  which  has  offered  quite  extraordinary  inducements  to 
investors  who  were  content  to  hold  it  for  a  period  of  years.  On 
the  basis  of  its  nominal  dividend,  the  yield,  on  a  price  of  $300 
per  share,  is  only  a  little  over  2%.  If,  however,  the  investor  were 
to  include  the  cash  value  of  rights,  he  will  find  that  from  1899, 
when  the  Great  Northern  was  put  on  a  7%  basis,  to  1906,  the 
rights  amounted  to  more  than  11%  per  annum  to  say  nothing  of 
the  75%  dividend  in  ore  certificates,  and  to  a  great  deal  more 
than  that  to  the  shareholder  who  exercised  his  subscription 
rights. 

The  actual  average  return  for  a  period  of  seven  years  has 
been  around  18%,  and  including  the  cash  value  of  their  ore  cer- 
tificates of  1906,  around  28%.  This,  on  a  basis  of  $300  per  share 
would  mean  a  yield  of  from  6  to  9%  on  the  investment. 

If,  through  the  building  of  the  new  Spokane  Falls-Portland 
line,  the  Great  Northern's  extensions  in  Canada  and  the  lease 
of  the  ore  lands,  the  average  could  be  maintained,  the  Great 
Northern  would  more  likely  average  above  $300  per  share 
through  this  period  than  below  it.  Air.  Hill  takes  an  intense  pride 
in  the  property  of  his  road,  and  justly  ;  his  fortune  is  made,  and 
there  is  no  reason  to  suppose  that  his  stockholders  will  fare  any 
worse  in  the  future  than  in  the  past. 

What  then  is  to  be  said  of  the  heavy  slump  in  Great  Northern 
at  the  beginning  of  1907,  when  in  the  stock  panic  of  March  14, 
it  touched  as  low  as  $126  per  share,  which,  with  prospective 
rights  worth  about  $8  per  share,  was  equivalent  to  around  $120. 
This  was  by  far  the  lowest  point  which  Great  Northern  has 
touched  in  many  years.  Combining  this  price,  rights  included, 
with  the  low  figures  for  the  ore  certificates  of  $50,  this  was 
equivalent  to  a  valuation  of  $176  per  share,  as  compared  with  the 
high  figures  of  $348  reached  in  1906.  This  was  a  drop  of  nearly 
one-half,  a  tremendous  fall.  No  other  solid  stocks,  save  the  North- 
ern Pacific  showed  anything  like  such  a  decline.  It  is  well  known 
that  this  heavy  fall  was  a  surprise  even  to  those  supposed  to  be  in 
close  association  with  the  Great  Northern  management,  for  it  is 
equally  well  known  that  they  had  advised  the  purchase  of  Great 
Northern  at  considerably  above  $300  per  share. 


GREAT  NORTHERN  351 

Among  other  explanations  offered,  was  the  heavy  selling 
of  the  stock  by  the  Union  Pacific,  which  disposed  of  the  large 
part  of  its  interests  acquired  through  the  dissolution  of  the 
Northern  Securities  Company;  the  extension  of  the  St.  Paul  to 
the  Pacific,  invading  Hill  territory  ;  and  the  rather  hostile  attitude 
assumed  by  the  Minnesota  authorities  toward  the  proposed  issue 
of  new  securities. 

It  is  true  that,  as  already  noted,  the  high  price  of  Great 
Northern  has  been  due  to  the  large  profits  accruing  periodically 
from  the  substantial  "rights"  offered  to  stockholders,  and  it  was 
assumed  that  official  or  legislative  action  might  seriously  inter- 
fere with  this  very  agreeable  process.  The  decline  was  further 
helped  by  the  suit  brought  by  the  State  of  Minnesota  for  the 
abrogation  of  the  charter  of  the  St.  Paul,  Minneapolis  and  Mani- 
toba, the  chief  constituent  of  the  Great  Northern  system,  this 
action  being  taken  on  the  ground  that  in  its  stock  issues  the 
parent  road  had  exceeded  the  terms  of  its  charter. 

There  is  no  doubt  that  the  generally  hostile  spirit  towards 
the  railways,  which  reached  a  somewhat  acute  stage  in  the 
winter  of  1906-7,  would,  if  continued,  tend  materially  to  depress 
railway  values,  and  especially  of  those  roads  lying  in  states 
where  opposition  to  the  railroads  is  a  popular  political  card.  For 
this  reason,  it  is  very  difficult  to  estimate  the  future  course  of 
the  Great  Northern  securities,  but  it  is  to  be  noted  that  there 
are  other  methods  of  "belling  the  cat"  than  the  especial  form  of 
stock  issues  to  shareholders  at  much  below  the  market  value. 
Should,  therefore,  the  territory  covered  by  the  Great  Northern 
experience  no  heavy  depression,  it  may  be  assumed  that  the 
liberal  policy  of  the  company  towards  its  shareholders  will  be 
continued  in  one  form  or  another,  and  even  if  it  were  not,  should 
earnings  continue  as  heavy  as  in  the  past  10  years,  they  would 
be  adding  constantly  to  the  value  of  the  property,  whether  dis- 
tributed in  dividends  or  put  back  into  the  road. 

In  any  event,  Great  Northern  may  be  looked  upon  as  per- 
haps as  solid  a  seven  per  cent,  security  as  is  to  be  found  in  the 
country,  and  with  its  splendid  management,  it  would  tend  to  sell 
certainly  as  high  as  any  similar  security.  It  should  be  worth 
well  around  $175  per  share  without  further  prospects,  and  if 
purchased  at  any  considerable  recession  from  this  price,  would 
certainly  be  an  attractive  issue,  liable  to  show  large  profits  if 
put  away  and  held. 


352  GREAT  NORTHERN 

Ore  Certificates. 

As  to  the  value  of  the  ore  certificates,  it  seems  to  be  gener- 
ally assumed  that  they  will  be  able  to  pay  a  2)Ac/o  dividend,  at 
least,  in  1907,  with  a  steady  increase  in  this  dividend  from  the  in- 
creased revenues  provided  under  the  contract  with  the  United 
States  Steel  Corporation.  With  these  prospects  it  would  seem 
that  these  certificates  should  eventually  sell  around  par,  and  pur- 
chased at  around  the  low  prices  of  1907 — $50  per  share — would  be 
an  equally  attractive  investment.  Apparently  the  sole  factor  which 
would  militate  against  a  higher  price  is  the  fact  that  thus  far 
the  certificates  represent  simply  shares  in  a  blind  pool,  con- 
cerning which  little  or  no  information  has  been  offered.  The  ore 
properties  are  absolutely  in  the  hands  of  the  three  trustees, 
President  Hill  and  his  twro  sons.  But  the  income  of  these 
certificates  is  in  some  sense  doubly  guaranteed,  first  of  all  by 
the  contract  with  the  Steel  Corporation,  and  secondly  by  the 
great  body  of  ore  which  the  certificates  cover.  This  ore  must 
be  of  constantly  increasing  value  and  it  seems  likely  that  the 
annual  output  called  for  by  the  contract  will  be  exceeded,  rather 
than  held  to  the  minimum  limit  imposed. 

It  is  not  improbable  that  after  the  slight  panic  occasioned  by 
the  circumstances  narrated  above  has  passed,  both  the  ore 
certificates  and  Great  Northern  stock  will  tend  to  sell,  in  the 
long  run,  at  very  much  higher  figures. 


HOCKING  VALLEY  RAILWAY. 

The  Hocking  Valley  is  a  coal  road,  through  central  Ohio, 
from  Toledo  to  the  Ohio  River.  It  directly  operates  347  miles  of 
road  and  owns  practically  all  of  the  capital  stock,  both  common 
and  preferred  of  the  Toledo  &  Ohio  Central,  a  parallel  road 
throughout  almost  the  entire  length,  operating  441  miles.  On 
August  1st,  1906,  it  also  owned  a  majority  of  the  outstanding 
stock  of  the  Kanawha  &  Michigan,  operating  a  total  of  177 
miles  and  extending  the  system  into  West  Virginia,  on  the  line 
of  the  Chesapeake  &  Ohio.  This  stock  was  apparently  taken 
over  from  the  Toledo  &  Ohio  Central,  by  which  it  had  been 
owned  since  1890.  In  August,  1906,  the  plan  was  brought  out 
for  the  consolidation  of  the  Hocking  Valley  and  the  Kanawha 
&  Michigan,  but  this  plan  was  postponed  partly  on  account  of 
the  bond  market,  partly  on  account  of  the  suit  brought  by  the 
attorney  general  of  Ohio  to  prevent  the  consolidation,  on  the 
ground  that  it  was  a  violation  of  the  Valentine  trust  law  of  that 
state. 

In  1903  practical  control  of  the  Hocking  Valley  was  secured 
jointly  by  five  roads  through  the  purchase  of  $6,924,200  of  the 
outstanding  common  stock,  the  purchasing  companies  being 
the  Pittsburgh,  Cincinnati,  Chicago  &  St.  Louis,  one-third  in- 
terest, and  the  Baltimore  &  Ohio,  Chesapeake  &  Ohio,  Lake 
Shore  &  Michigan  Southern  and  Erie  Railroad  one-sixth  interest, 
each,  the  purchase  being  on  a  basis  of  $103  per  share.  This 
stock  is  held  in  trust  by  J.  P.  Morgan  &  Co.,  that  firm  issuing 
5%  "participating  certificates"  to  the  amount  of  the  purchase 
price,  secured  by  the  stock  and  guaranteed  by  the  several  pur- 
chasing companies. 

The  Hocking  Valley  Railway  was  the  successor,  in  1899, 
of  the  Columbus,  Hocking  Valley  &  Toledo  Railway,  and  valua- 
ble coal  properties  were  taken  over  at  the  time  of  the  reorganiza- 
tion. 


23 


(353) 


354  HOCKING  VALLEY 

In  1906  the  directorate  included  president  N.  Monsarrat, 
vice-president  Ralph  W.  Hickox,  second  vice-president  James 
H.  Hoyt,  R.  M.  Gallaway,  president  Merchants  National  Bank, 
New  York;  Charles  B.  Alexander,  S.  P.  Bush,  W.  N.  Cott,  A.  H. 
Gillard,  C.  G.  Hickox,  P.  W.  Huntington,  Thomas  F.  Ryan,  R. 
S.  Warner,  and  H.  R.  Wilson. 

Capitalization. 

As  of  June  30th,  1906,  the  capital  account  stood  as  follows  : 

Common  stock $11,000,000 

Preferred  stock 15,000,000 

Total  stock $26,000,000 

Funded  debt 20,770,524 

Nominal    capital $46,770,524 

Rentals  cap.  at  4% 5,675,000 

Approx.   gross  capitalization $52,445,524 

Securities  held 12,894,681 

Approx.  net  capitalization $39,550,843 

Average  net  capital,  per  mile $113,970 

Average  miles  operated 347 

Net  earnings  on  net  capitalization 6.2% 

Stock    on    net    capitalization 65% 

Fixed  Charges  on  Total  net  Income.  ...  31% 

Factor    of    Safety 69% 

It  will  be  seen  that  the  estimated  net  capitalization  is  high 
even  for  a  road  earning  as  it  did  in  1906,  $18,558  per  mile.  The 
showing  of  net  earnings  on  net  capitalization,  6.2%,  was  after 
very  heavy  maintenance,  and  this  figure  would  be  increased  if 
these  charges  had  been  more  nearly  on  the  same  basis  of  other 
roads  in  the  same  territory. 

It  will  be  seen  that  the  larger  part,  almost  two-thirds,  of 
the  net  capitalization  was  represented  by  stock  and  in  1906  fixed 
charges  consumed  only  31%  of  the  total  net  income,  even  after 
the  heavy  maintenance  charges  noted.  This  left  a  high  margin 
of  safety  for  the  underlying  securities. 


HOCKING  VALLEY 


355 


The  item  of  securities  owned  includes  $1,237,500  equipment 
notes  of  the  Kanawha  &  Michigan  Railway.  The  balance  in- 
cludes over  99%  of  the  stock  of  the  Toledo  &  Ohio  Central  out 
of  a  total  of  $6,500,000  common,  and  $3,708,000  preferred.  Al- 
though the  securities  held  are  not  itemized  by  the  report,  the 
figure  given  presumably  included  also  the  $4,510,000,  par  value 
of  the  Kanawha  &  Michigan,  representing  a  controlling  interest 
in  that  road.  On  the  Toledo  &  Ohio  Central  stock  no  dividends 
had  been  received  for  some  years,  but  the  earnings  of  that  road 
in  1906,  after  heavy  maintenance  charges,  and  before  charging  off 
large  appropriations  for  improvements,  were  equivalent  to  5% 
on  the  preferred  and  6.3%  on  the  common.  In  other  words,  the 
Hocking  Valley's  equity  in  the  earnings  of  the  Toledo  &  Ohio 
Central  for  1906  were  nominally  in  excess  of  half  a  million  dollars, 
and,  actually,  considerably  more. 

No  dividends  were  paid  likewise  by  the  Kanawha  &  Michi- 
gan and  its  nominal  net  surplus  was  equivalent  to  only  about 
3.3%  of  the  stock.  This,  however,  was  after  very  heavy  charges 
for  maintenance  and  the  actual  earnings  on  a  normal  mainte- 
nance basis  were  probably  more  than  twice  this. 

Stability  of  Traffic. 

The  Hocking  Valley  is  very  largely  a  coal  road,  the  coal 
tonnage  for  1906  representing  over  60%  of  the  entire  tonnage. 
The  earnings  since  the  reorganization  have  compared  as  follows: 


Year 


1899-0 
1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


Miles  Operated 

Gross  Earnings 

Per  Mile 

346 

$4,417,267 

$12,766 

347 

4,653,258 

13,409 

347 

5,316,523 

15,321 

347 

6  ,049  ,598 

17,434 

347 

.       5  ,725  ,483 

16,500 

347 

6,013,215 

17  ,330 

347 

6,439,809 

18,558 

Maintenance. 


The  traffic  density  and  maintenance  for  a  period  of  six  years 
have  compared  as  follows : 


356 


HOCKING  VALLEY 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

2,437,218 
2 ,891 ,561 
3 ,034 ,866 
2,553,133 
2  ,877  ,743 
2,875,387 

$1  ,489 
1,637 
1,747 
1,701 
1,877 
1  ,984 

$2,154 
2,479 
3,229 
3,377 
3,728 
3,819 

$3,643 
4,116 
4,976 
5,078 
5,605 
5,803 

Average 

2,778,318 

$1 ,739 

$3,131 

$4  ,S70 

Tol.  &  0.  Cen. 
Tol.St.L.&W. 

1,423,424 
1,046,139 

$1  ,225 
996 

$1,471 
959 

$2 ,696 
1  ,955 

It  will  be  seen  that  the  maintenance  charges  have  been  very 
high,  and  would  compare  with  eastern  trunk  lines  of  similar 
traffic  density.  Probably  the  maintenance  charges  for  1905  and 
1906  were  considerably  in  excess  of  $1,000  per  mile  over  the 
actual  needs  of  the  road,  and  this  amount  might  legitimately  be 
added  to  the  surplus  shown  for  these  two  years.  But  on  the 
other  hand,  these  charges  include  the  appropriations  for  improve- 
ments and  there  were  no  separate  items  for  this  latter  amount. 

Surplus  Earnings. 

For  a  period  of  six  years  the  surplus  available  for  dividends 
has  compared  as  follows: 


Year 

Surplus 

Dividends 

on 

Preferred 

Stock 

Per  cent.      Dividends 
Earned           Paid 

on  Stock            on 
Capital     |   Common 

Average 
Price 

Calendar 
Year 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

$1,354,177 
1 ,602  ,373 
1,824,199 
1 ,404  ,793 
1  ,427  ,851 
1  ,772  ,933 

3* 

4 

4 

4 
4 

4 

5.5 
6.5 
7.3 
5.4 
5.5 
6.5 

3 
3 
3 
3 
3 
3 

57 
83 
84 
77 
104 
124 

The  dividend  record  of  the  road  since  its  reorganization  has 
been  as  follows : 


1900. 
1901. 
1902. 
1903. 
1904. 
1905. 
1906. 


Preferred. 

Common 

zy2% 

.  . 

4 

3% 

4    . 

3 

4 

3 

4 

3 

4 

3 

4 

3 

HOCKING  VALLEY  357 

The  Balance  Sheet. 

As  of  June  30th,  1906,  the  balance  sheet  showed: 

Current   assets $4,343,861 

Current   liabilities 1,509,324 

Leaving  a  working  balance  of $2,834,537 

The  item  of  cash  amounted  to  $2,007,644.  The  balance  to 
credit  of  profit  and  loss  was  $4,721,990. 

Not  included  in  the  capital  account  given  were  car  trust 
bonds  to  the  amount  of  $960,000.  This  was  offset  by  advances 
to  subsidiary  companies  of  $2,999,819. 

Consolidation  Plan. 

According  to  the  circular  issued  to  the  stockholders  of  the 
Hocking  Valley  and  the  Kanawha  &  Michigan  Railroads,  the 
consolidation  plan  involved  the  retirement  of  the  $15,000,000  of 
preferred  stock  of  the  Hocking  Valley,  which  ma}'  be  retired  at 
par,  and  the  exchange  of  $11,000,000  of  common  for  $11,000,000 
stock  in  the  new  company.  In  lieu  of  the  $4,490,000  stock  of  the 
Kanawha  &  Michigan  outstanding  in  the  hands  of  the  public, 
there  was  to  be  issued  of  stock  in  the  new  company,  $2,694,000 
par  value,  and  in  lieu  of  the  remaining  stock  of  the  Kanawha  &: 
Michigan  Company  held  by  the  Hocking  Valley,  amounting  to 
$4,510,000  (the  treasury  stock  to  be  cancelled),  $56,000  of  stock 
of  the  new  company. 

Holders  of  the  preferred  stock  of  the  Hocking"  Valley  w<  re 
to  be  offered  general  lien  4%  30  year  gold  bonds  to  the  amount 
of  $110  for  each  $100  of  the  preferred  stock.  The  exchange  of 
common  stock  for  stock  in  the  new  company  was  to  be  on  a  par 
basis,  and  the  stock  of  the  Kanawha  &  Michigan  on  a  basis  of 
$60  par  value  stock  oi  the  new  companv  for  each  $100  of  the  old. 
Under  this  arrangement,  $17,000,000  of  the  new  general  lien 
bonds  would  be  exchanged  for  stock,  and  the  total  stock  of  the 
new  company  on  this  basis  would  be  $13,750,000,  as  against  a 
combined  issue  of  $35,000,000  of  stock  of  the  two  consolidating 
companies.  The  effect  of  this  conversion  plan  would  be  to  give, 
the  five  roads  holding  a  large  majority  of  the  common  stock  of 
the  Hocking  Valley,  absolute  control  of  the  consolidated  com- 
pany. The  balance  of  $13,000,000  of  the  proposed  issue  of  gen- 
eral lien  bonds  was  to  be  reserved  for  future  issue. 


358  HOCKING  VALLEY 

Investment  Value. 

Hocking-  Valley  preferred  is  redeemable  at  par,  entitled 
to  4%  non-cumulative  dividends,  but  after  4%  have  been  paid  on 
both  preferred  and  common,  both  classes  of  stock  are  entitled  to 
share  alike.  The  dividends  have  been  paid  in  full  since  1900. 
The  yield  from  the  bonds  to  be  issued  for  this  stock  at  $110, 
under  the  consolidation  plan,  would  be  slightly  in  excess  of  this, 
or  4.4%. 

Dividends  of  3%  have  been  paid  on  the  common  stock  since 
1901.  Reference  to  the  surplus  earnings  will  show  that  this  has 
been  comfortably  earned  and  on  a  basis  of  less  liberal  mainte- 
nance charges,  might  readily  have  been  increased.  Under  the 
conversion  plan,  the  common  stockholders  receive  new  stock  of 
the  same  nominal  value  but  the  actual  value  should  be  very  con- 
siderably augmented — first,  because  the  nominal  capital  of  the 
combined  roads  has  been  reduced  by  $4,250,000,  with  very  little 
increase  in  the  fixed  charges  (as  compared  with  the  4%  divi- 
dends paid  on  the  preferred  stock  of  the  Hocking  Valley),  and 
secondly,  because  the  $13,750,000  of  stock  in  the  new  company 
will  have  the  entire  equity  in  the  surplus  earnings  ot  the  com- 
bined roads.  The  earnings  of  the  Kanawha  &  Michigan  are 
amply  sufficient  to  pay  much  more  than  a  3%  dividend  (as  on  the 
old  Hocking  Valley  common)  on  the  $2,750,000  of  stock  of  the 
new  company  to  be  issued  in  lieu  of  the  $9,000,000  stock  out- 
standing. 

In  1902,  Hocking  Valley  common  rose  as  high  as  $106  per 
share,  declining  in  the  subsequent  reaction  to  $60.  It  rose  to 
$121  in  1905  and  as  high  as  $135  per  share  in  1906.  It  is  rather 
difficult  to  understand  these  high  quotations,  because  there  is 
only  a  little  more  than  $4,000,000  of  this  stock  outstanding  and 
the  control  of  the  road  is  held  absolutely  by  the  five  companies 
participating  in  the  purchase  of  1903.  These  prices  would  hardly 
have  been  justified  by  expectation  of  less  than  a  6%  dividend  and 
this  dividend  could  scarcely  have  been  paid  unless  the  mainte- 
nance charges  of  the  road  had  been  considerably  scaled.  In  May, 
1907,  the  stock  sold  at  $75  per  share. 

Unless  a  serious  general  reaction  should  ensue,  vitally  affect- 
ing the  coal  business,  it  does  not  seem  improbable  that  the  new 
Hocking  Valley  Company  might  readily  earn  the  4%  required 
for  the  proposed  issue  of  $17,000,000  of  bonds,  and  comfortably 


HOCKING  VALLEY  359 

pay  a  dividend  of  5  or  6%  on  the  $13,750,000  stock  of  the  new 
company.  But  the  permanency  of  these  dividends  would  rest 
upon  the  continuance  of  a  high  degree  of  prosperity  in  the  coal 
industry  and  therefore  should  be  considered  on  much  the  same 
basis  as  the  stocks  of  the  Baltimore  &  Ohio  and  other  bituminous 
coal  roads.  Should  the  annual  high  interest  rates  of  1906  con- 
tinue, the  new  Hocking  Valley  stock  could  scarcely  be  worth 
much  above  par,  but  were  these  interest  rates  to  decline,  it 
might  readily  sell  at  higher  figures. 


ILLINOIS  CENTRAL  RAILROAD. 

Up  to  1906,  the  Illinois  Central  was  one  of  the  great  inde- 
pendent lines  of  the  country  and  the  chief  north  and  south  road 
of  the  Mississippi  Valley.  Its  main  lines  reach  from  Chicago  to 
New  Orleans,  to  all  intents,  with  its  subsidiary  lines,  a  double 
track  the  entire  distance,  and  it  has  also  an  extension  westward 
from  Chicago  through  Illinois  and  northern  Iowa,  to  Omaha, 
Sioux  City  and  Sioux  Falls. 

The  Illinois  Central  directly  operates  4,459  miles  and  with 
the  1,239  miles  of  its  subsidiary,  the  Yazoo  and  Mississippi  Val- 
ley, a  total  of  about  5,700  miles.  The  gross  earnings  of  the  entire 
system  in  1906  were  above  sixty  million  dollars.  The  capitalization 
is  moderate ;  the  road  has  been  under  sound  and  conservative  man- 
agement and  its  securities  and  its  stock  have  commanded  a  high 
premium. 

History. 

Even  while  Chicago  was  still  a  village  an  attempt  was  made 
to  raise  money  to  build  a  line  connecting  Lake  Michigan  with  the 
Ohio  River.  This  was  far  back  in  1834,  when  the  Erie  and  the 
Baltimore  and  Ohio  had  just  been  started,  and  the  people  of  this 
Far  West  of  America  sought  more  rapid  communication  with 
the  East;  but  it  was  not  until  1851  that  the  Illinois  Central  Rail- 
road was  chartered. 

Through  the  government  it  had  received  a  magnificent  land 
grant,  a  strip  twelve  miles  broad  running  north  and  south 
throughout  Illinois.  In  lieu  of  taxes  the  company  was  to  pay 
the  state  7%  of  its  gross  earnings,  on  its  original  700  miles  of 
road  in  Illinois.  Between  1852  and  1871  the  road  had  realized 
io  less  than  $24,000,000  from  the  sale  of  these  lands,  or  quite 
enough  to  pay  for  the  Illinois  property  outright.  The  line  from 
Chicago  to  Dubuque  was  begun  in  1855,  and  the  through  line  to 
Cairo  at  the  junction  of  the  Ohio  and  Mississippi  in  1856.     The 

(360) 


ILLINOIS  CENTRAL  361 

Construction  and  leasing  in  1867  of  the  Dubuque  and  Sioux  City 
carried  the  line  through  Iowa,  and  in  1882  the  Chicago,  St.  Louis 
and  New  Orleans  was  leased  and  its  stock  absorbed,  and  this 
carried  the  lines  of  the  system  south  from  Memphis  to  New 
Orleans.  The  purchase  of  the  Louisville,  New  Orleans  and  Texas 
and  its  consolidation  with  the  Yazoo  and  Mississippi  Valley  in 
1882,  with  subsequent  constructions,  has  given  the  road  a  per- 
fect network  of  lines  extending  down  the  eastern  side  of  the 
Mississippi,  through  Illinois,  Kentucky,  Tennessee  and  Missis- 
sippi. An  extension,  with  trackage  rights,  will  carry  the  road  into 
Birmingham,  Ala.,  and  another  extension  into  Indianapolis. 

The  peculiarity  of  the  Illinois  Central  is  the  fact  that  it 
is  practically  a  watergrade  line  throughout  its  main  length,  and 
that  with  an  average  freight  rate  of  only  .55c  per  ton  per  mile,  it 
is  able  to  earn  large  profits.  Within  very  recent  years  it  has  like- 
wise profited  by  the  increasing  popularity  of  the  Gulf  as  a  grain 
route  from  the  fields  of  the  west,  a  competition  that  is  now  being 
keenly  felt  by  the  eastern  trunk  lines. 

Ownership. 

The  Illinois  Central  from  its  organization  had  enjoyed  an 
exceptional  degree  of  independence,  its  stock  being  widely  dis- 
tributed, and  no  single  interest  dominating.  In  1905  it  reported 
9,123  shareholders.  The  formation  in  1902  of  the  Railroad  Securi- 
ties Company  introduced  a  new  element  into  the  question  of  con- 
trol. The  company  was  formed  by  a  union  of  the  Fish,  Speyer 
and  Harriman-Kuhn  Loeb  interests,  owning  then  about  $8,000,- 
000  of  Illinois  Central  stock,  and  the  company  was  formed  for 
the  purpose  of  further  purchases.  The  Speyer  holdings  were 
sold  to  the  Harriman  interest  with  the  result  of  considerably 
increasing  the  Harriman  influence  in  the  Illinois  Central,  and  in 
1906  this  interest  came  into  practical  control. 

For  years  President  Fish  had  voted  the  majority  of  the  stock 
from  proxies  held,  and  in  1906  still  held  a  majority  by  proxy, 
outside  the  Harriman  holdings.  But  in  the  following  election  of 
president  by  the  trustees,  eight  of  the  directors  voted  against  Mr. 
Fish  and  chose  J.  T.  Harahan  president.  The  directors  voting 
for  Mr.  Harahan  were  J.  T.  Harahan,  E.  H.  Harriman,  Chas.  A. 
Peabody,  President  of  the  Mutual  Life  Insurance  Company  and 
formerly  attorney  of  the  Astor  estate ;  J.  W.  Auchincloss,  a  mem- 


362  ILLINOIS  CENTRAL 

ber  of  the  so-called  white-washing  Investigating  Committee  of 
the  Mutual  Life  Insurance  Company,  from  which  Mr.  Fish  has 
resigned  because  of  the  refusal  of  the  committee  to  make  a  more 
thorough  examination  of  the  company's  officers;  John  Jacob 
Astor,  Robert  W.  Goelet,  of  the  Goelet  estate;  and  Cornelius 
Vanderbilt. 

Of  these.  Messrs.  Harriman,  Peabody  and  Goelet  are  di- 
rectors of  the  Union  Pacific.  Mr.  Harahan  was  then  second  vice- 
president  of  the  Illinois  Central  and  had  long  been  closely  asso- 
ciated with  Mr.  Fish. 

Supporting  Mr.  Fish  were  Governor  Chas.  S.  Deneen,  ex- 
officio  director,  as  Governor  of  Illinois ;  Chas.  M.  Beach,  James 
DeWitt  Cutting  and  John  C.  Welling,  vice-president,  the  latter  not 
present  at  the  meeting. 

It  appeared  subsequently  in  the  testimony  taken  by  the  Inter- 
state Commerce  Commission  that  the  Union  Pacific  had  pur- 
chased the  holdings  of  the  Railroad  Securities  Company,  chiefly 
owned  by  Mr.  Harriman,  the  president  of  the  Union  Pacific,  and 
had  otherwise  acquired  sufficient  stock  to  bring  the  total  up  to 
about  29%  of  the  $90,000,000  of  outstanding  stock.  This  stock 
was  purchased  by  the  Union  Pacific  at  about  $175  per  share,  or 
very  nearly  the  top  price  reached  by  the  stock  during  the  struggle 
of  the  Harriman-Fish  interests  for  control.  A  few  months  subse- 
quent to  this  purchase  Illinois  Central  stock  was  selling  at  around 
$135  per  share. 


Capitalization. 

Ten  millions  of  Leased  Lines  stock  was  issued  in  exchange 
for  an  equal  amount  of  Chicago,  St.  Louis,  New  Orleans  stock 
and  is  secured  by  a  deposit  in  trust  of  the  latter  stock.  It  is  guar- 
anteed at  the  rate  of  4%  per  annum  and  in  case  of  default  for 
sixty  days  in  any  semi-annual  payment  the  holders  of  the  cer- 
tificates will  be  entitled  to  the  return  of  the  stock  so  pledged.  In 
the  following  table  this  stock  has  been  included  as  a  part  of  the 
interest  debt  of  the  company. 


ILLINOIS  CENTRAL  363 

On  June  30th,  1906,  the  capital  account  stood  as  follows : 

Common    stock $95,040,000 

Funded  debt,  111.  Cent 128,660,275 

Funded  debt,  C.  St.  L.  &  N.  0 16,234,000 

Leased  line  stock  (4%  guar.) 10,000,000 

Total  capital $249,934,275 

Rentals  capit.  at  4% 28,680,000 

Approx.  gross  capit $278,614,275 

Securities  held 60,315,548 

Approx.  net   capital $218,298,727 

Approx.  net  capital,  per  mile $49,790 

Average   miles   operated 4,424 

Net  earnings  on  net  capitalization.  . .  .  7.9% 

Stock  on  net  capitalization 43% 

Fixed  Charges  on  total  net  income...  47% 

Factor  of  Safety 53% 

The  item  of  rentals  capitalized  is  the  $1,187,000  net  interest 
paid  as  the  rental  on  the  Dubuque  and  Sioux  City. 

With  this  addition  it  will  be  seen  that  the  approximate  net 
capitalization  amounts  to  $49,790  per  mile  as  against,  for  ex- 
ample, a  similar  estimate  of  $114,480  per  mile  for  the  Alton; 
$39,684  for  the  Louisville  and  Nashville,  and  $46,710  for  the  St. 
Louis  and  San  Francisco. 

This  capitalization  is  very  moderate  for  a  road  of  the 
strength  and  position  of  the  Illinois  Central  and  in  the  face  of 
rather  unusual  maintenance  charges,  the  net  earnings  of  1906 
showed  7.9%  on  this  estimated  net  capitalization.  This  figure 
stood  against  similar  estimates  of  3.7%  for  the  Alton ;  8.9%  for 
the  Louisville  and  Nashville;  and  4.8%  for  the  St.  Louis  and  San 
Francisco,  all  roads  of  more  or  less  the  same  character. 

It  will  be  seen  that  the  stock  amounts  to  considerably  less 
than  half  of  the  estimated  net  capitalization  but  the  credit  of  the 
Central  is  high,  and  even  after  the  maintenance  charges  already 
referred  to,  Fixed  Charges  consumed  only  47%  of  the  Total  Net 
Income,  leaving  a  Factor  of  Safety  on  the  underlying  securities 
of  53%. 


364  ILLINOIS  CENTRAL 

Equities  Owned. 

On  the  $60,000,000  of  securities  owned  in  the  treasury,  the 
company  received  in  1906  a  net  of  $3,255,398,  equivalent  to  5.2% 
on  the  book  valuation. 

These  securities  are  rather  widely  distributed  and  are  chiefly 
the  stocks  and  bonds  of  leased  lines.  The  most  notable  item  and 
the  only  one  in  which  lies  any  considerable  equity,  is  $9,104,000 
5%  second  mortgage  bonds  of  the  Louisville,  New  Or- 
leans and  Texas;  and  $9,904,000  land  grant  income  bonds 
of  the  same  road.  This  is  now  a  part  of  the  Yazoo 
and  Mississippi  Valley.  On  the  land  grant  bonds  no 
interest  has  ever  been  paid,  and  there  is  no  great  prospect  that 
any  will  be  paid  in  the  immediate  future.  In  regard  to  the  sec- 
ond mortgage  bonds,  it  is  provided  that  the  interest  is  only  to 
be  paid  when  so  determined  by  the  board  of  directors,  but  the 
interest  is  cumulative,  and  in  case  less  than  2l/2%  is  paid,  the  un- 
paid interest,  with  the  interest  on  the  interest  at  5%,  is  carried 
forward  to  the  credit  of  the  bonds  for  subsequent  payment.  On 
these  bonds  the  Illinois  Central  received  payments  from  1893  to 
1903,  ranging  from  $1,980,000  to  $1,016,000  per  annum.  None  has 
been  paid  since,  and  in  1906  the  arrears  of  interest  on  these 
bonds  amounted  to  $6,567,843.  This  is  not  carried  on  the  books 
of  the  Illinois  Central  as  an  asset,  but  the  arrearages  would 
necessarily  absorb  the  surplus  earnings  of  the  road  for  some 
years  to  come.  In  the  discussion  on  the  Yazoo  and  Mississippi 
Valley,  it  will  be  seen  that  the  maintenance  was  so  heavily 
charged  that  there  was  a  considerable  excess  maintenance  charge 
amounting  to  perhaps  $700  per  mile,  and  this  on  the  total  mile- 
age, would  have  left  a  surplus  on  the  year's  earnings  of  the  road 
of  about  $850,000,  which  might  legitimately  have  been  paid  into 
the  treasury  of  the  Illinois  Central. 

Increase  of  Capitalization. 

Through  the  sale  of  stock  at  par  to  stockholders  in  1901-2, 
the  capital  stock  of  the  road  was  increased  by  about  50%,  and 
the  sum  so  derived  was  devoted  mainly  to  double  tracking  and 
other  improvements  which  are  now  almost  complete.  In  1906 
there  were  750  miles  of  extra  main  track  on  the  whole  line.  The 
larger  part  of  the  increase  in  Funded  Debt  is  due  to  the  issue  of 


ILLINOIS  CENTRAL 


365 


purchase  line  bonds  distributed  over  about  730  miles  of  added 
track.    The  comparison  of  increase  for  six  years  is  as  follows : 


Year 

Common 
Stock 

Funded 
Debt 

Total 
Capital 

Gross 
Earnings 

1899-1900 

1905-1906 

$60  ,000  ,000 
95,040,000 

$130,873,925 
154,894,275 

$190,873,925 
249,934,275 

$32,611,967 
51  ,636  ,405 

Increase  over  six  years:  Total  capital,  31%;  gross  earn- 
ings, 60%. 

Character  of  Traffic. 

The  Illinois  Central  is  one  of  the  few  roads  giving  very  full 
reports  of  its  operations  which  does  not  itemize  or  give  any  indi- 
cation as  to  the  character  of  its  traffic.  That  this  traffic  is  in 
general  of  low  grade  is  indicated  in  the  low  average  rate  per  ton 
per  mile.  This  amounted  to  only  .58c  in  1905  and  .55c  in  1906. 
The  decrease  in  1906  was  probably  due  in  part  to  the  increased 
carriage  of  grain  to  the  Gulf. 

Stability  of  Earnings. 

Since  1896  the  mileage  and  earnings  of  the  road  have  stood  as 
follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1895-6 

1896-7 

1897-8 

1898-9 

1899-0 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

3,067 
3,130 
3,775 
3,671 
3,845 
4,215 
4,276 
4,293 
4,340 
4,374 
4,424 

$22,002,842 
22,110,938 
27,317,820 
28,114,690 
32,611,967 
36  ,900  ,460 
40,821,030 
45,186,077 
46,831,136 
49,508,650 
51  ,636  ,405 

$7,174 
i  7,064 
17,236 
f 7  ,658 
I  8,481 
T8,754 
9,546 
10,526 
10,790 
11,319 
11,672 

It  will  be  seen  that  with  about  a  fifty  per  cent,  increase  in 
operated  mileage,  the  gross  earnings  have  increased  more  than 
one  hundred  per  cent.,  raising  the  average  per  mile  from  $7,174 
in  1896  to  $11,672  in  1906. 

This  increase  was  very  gradual  and  reflects  the  solid  char- 
acter of  the  road. 


366 


ILLINOIS  CENTRAL 
Maintenance. 


The  Illinois  Central  is  from  the  lie  of  its  lines  unusually 
subject  to  flood  damage,  and  its  maintenance  of  way  is  therefor^ 
considerably  higher  than  that  of  other  roads  in  the  middle  west. 
For  example,  the  maintenane  of  way  of  the  St.  Paul  in  1906 
was  $855  as  against  $1,549  for  the  Central,  but  it  should  be 
remembered  that  the  traffic  density  of  the  Central  is  double  that 
of  St.  Paul.  The  items  through  a  series  of  years  have  been  as 
follows : 


Maintenance  per  Mile 

Year 

Traffic  Density 

Total 

Way 

Equipment 

1900-1 

952,808 

$1 ,390 

$1 ,033 

S2.423 

1901-2 

1,041,177 

1,321 

1,237 

2,558 

1902-3 

1,205,816 

1,376 

1,455 

2,831 

1903-4 

1,202,929 

1,308 

1,675 

2,983 

1904-5 

1,270,977 

1,393 

1,778 

3,171 

1905-6 

1 ,408  ,403 

1,549 

1,740 

3,289 

Average 

1,180,351 

$1  ,389 

$1 ,486 

t&Z  >o#  z 

Extra  main  track,  750  miles. 


Alton 

L.  &  N 

St.  L.  &  S.  F. 


1,099,515 
929,594 
448  ,625 


$2  ,644 
3,027 
1 ,517 


Improvements  From   Earnings. 


In  addition  to  the  very  liberal  maintenance,  the  following- 
appropriations  have  been  made  from  the  surplus  earnings  for 
improvements: 

1900-1 $3,145,400 

1901-2 4,340,172 

1902-3 4,881,253 

1903-4 2,579,329 

1904-5 1,683,886 

1905-6 4,164,739 

Total,   six  years $20,794,779 

These  heavy  appropriations  indicate  the  highly  conservative 
character  of  the  management,  and  its  disposition  to  charge  im- 
provements to  earnings. 


ILLINOIS  CENTRAL 
Surplus  Earnings. 


367 


Before  charging  off  Surplus   Earnings  the  annual  surplus 
from  1901  has  been  as  follows : 


Year 

Surplus 

Per  cent. 

Earned  on 

Common 

Dividends 

Paid  on 

Common 

Average 
Price 

1900-1 

$6,967,659 
9,790,462 

10,729,393 
8,865,928 

10,135,342 

10,862,339 

10.5 
12.4 
11.2 
9.3 
10.6 
11.4 

6 
6 
6 
6 
6  and  1  % 
7 

130 

1901-2 

140 

1901-3 

149 

1903-4 

134 

1904-5 

136 

1905-6 

166 

It  will  be  seen  that  in  1906  practically  all  of  the  surplus  earn- 
ings over  and  above  the  7%  dividend  was  turned  back  into  the 
road. 

Dividend  Record. 

The  Illinois  Central,  through  three  great  periods  of  depres- 
sion has  still  been  able  to  keep  on  its  feet,  and  continue  its  divi- 
dend payments.  Since  the  opening  of  the  road,  from  1865  to 
1906,  $120,000,000  has  been  received  by  the  stockholders  in  divi- 
dends, in  addition  to  the  scrip  distributions.  In  the  same  period 
the  company  has  received  for  improvements  from  income  over 
$110,000,000  in  cash.  In  forty  years  the  road  has  never  missed  a 
dividend.    The  dividend  record  since  1865  stands  as  follows: 


Year  Per  cent. 

1865-73 10  |    ] 

1874-6 8 

1877 4 

1878-80 6 

1881—2  7 

1883.  .  .' .' ." .' .' .' .' .' .'   8  and  17%  in  Chi.,  St.  L.  &  N.  O.  stocK 

exchangeable  for  leased  line  certificates. 

1884 10 

1885 8 

1886 1\ 

1887-8 7 

1889 5i 

1890 6 

1891-9 5 

1900 5* 

1901-4 6 

1905- 6  and  1  %  extra. 

1906 7 


368  ILLINOIS  CENTRAL 

The  Balance  Sheet. 

The  balance  sheet  as  of  June  30th,  1906,  showed : 

Current   assets $7,337,693 

Current  liabilities — 

Payable  on  demand $6,513,930 

Payable  at  future  dates 3,076,757—9,590,687 

Leaving  a  debit  balance  of $2,252,994 

Of  the  assets  the  item  of  cash  was  $1,591,523. 

The  balance  to  credit  of  profit  and  loss  was  small,  amount- 
ing to  $3,160,960. 

In  addition  to  these  items  there  was  about  $5,500,000  car- 
ried in  various  special  funds  for  improvements,  etc. 

Investment  Value. 

The  Illinois  Central  has  always  been  highly  prized  as  an 
investment  stock  both  at  home  and  abroad,  and  quotations  on  the 
stock  have  ruled  high.  From  1901  to  1904  inclusive  6%  divi- 
dends were  paid,  and  in  this  period  the  price  ranged  from  $124 
to  $173  per  share,  reaching  the  latter  figure  in  the  boom  of  1902. 
In  the  slump  of  1904  the  stock  declined  to  $126. 

In  1905  an  extra  dividend  of  1%  was  declared,  and  in  1906 
the  road  was  put  upon  a  regular  7%  basis.  The  stock  reached  a 
record  price  of  $184  in  June  of  1906.  This  high  figure  was  un- 
doubtedly due  to  the  fact  that  all  the  available  supply  was  being 
picked  up  in  the  Harriman  struggle  for  the  control  of  the  road. 

There  is  very  little  stock  in  the  market,  and  it  is  for  the  most 
part  closely  held.  Control  of  the  road  would  undoubtedly  com- 
mand $200  per  share  or  more,  but  in  the  decline  of  1907 
the  stock  fell  as  low  as  $134  per  share.  The  road  is  amply  earn- 
ing its  dividend ;  it  is  being  liberally  maintained ;  large  sums  are 
being  turned  back  for  improvements ;  in  its  own  territory  it  is 
almost  impregnable ;  in  brief,  there  are  few  railway  properties  in 
the  country  in  as  solid  position  financially  and  otherwise,  as  the 
Central.  Its  extension  has  been  steady  though  not  rapid.  Its 
policy  is  very  conservative,  and  under  the  Fish  regime  it  repre- 
sented the  highest  character  of  an  investment  stock. 

It  was  not  particularly  attractive  as  a  speculation  because 
the  fluctuations  in  its  price  were  not  heavy. 


ILLINOIS  CENTRAL  369 

Should  the  road  pass  completely  under  the  Harriman 
domination  the  suggestion  has  been  made  that  it  might  be  leased 
to  the  Union  Pacific.  That  road  could  guarantee  7%  dividends. 
It  is  probable  that  even  a  guarantee  of  8%  would  not  be  regarded 
as  excessive  for  so  valuable  a  property. 

The  Illinois  Central  has  been  in  some  sense  the  protege  of 
the  state  from  which  it  derives  its  name,  and  it  is  probable  that 
neither  the  people  of  that  state  nor  the  great  body  of  shareholders 
would  regard  a  lease  with  favor.  Probably,  therefore,  all  that 
Harriman  control  would  mean  would  be  much  closer  working 
relations  with  the  Union  Pacific  and  the  Southern  Pacific,  and 
the  introduction  of  Harriman  methods  into  its  management. 

At  $140  per  share  the  yield  is  just  5%,  with  a  high  degree 
of  security  for  a  railway  stock.  With  the  great  advantages  of  its 
watergrade  line  to  the  Gulf,  and  its  wide  ramifications,  its  earn- 
ings will  almost  inevitably  steadily  increase  and  should  no 
serious  depression  ensue  the  stock  should  steadily  increase  in 
value. 

Higher  dividends  than  7%  do  not  excite  the  same  enthusi- 
asm among  shippers  and  patrons  as  among  stockholders,  and  the 
stock  is  more  likely  to  be  held  at  its  present  dividend  than  either 
increased  or  decreased.  It  is  not  likely  that  at  any  time  any  con- 
siderable quantity  of  stock  would  be  thrown  upon  the  market;  at 
any  specially  attractive  price,  it  would  be  snapped  up  by  various 
interests.  At  anything  like  about  $140  per  share,  the  conserva- 
tive investor  will  probably  conclude  that  he  is  obtaining  a  very 
solid  stock,  with  quotations  which  are  more  likely  to  show  him  a 
gain  than  a  loss,  even  though  some  recession  should  come  from 
the  prosperity  of  1906. 


24 


INTERNATIONAL  AND  GREAT  NORTHERN 

RAILROAD. 

The  International  &  Great  Northern  Railroad  is  a  part  of  the 
Missouri  Pacific  system,  and  is  controlled  in  the  interest  of  that 
road,  but  is  separately  operated.  The  line  extends  from  Longview 
on  the  Texas  &  Pacific  southwesterly  through  Austin  to  Laredo 
on  the  Mexican  border,  where  it  joins  the  National  Railroad  of 
Mexico.    Branch  lines  reach  to  Houston,  Texas. 

As  of  January  1st,  1906,  the  company  had  outstanding: 

Stock    $9,755,000 

Funded    Debt 23,390,252 

Total $33,145,252 

For  the  calendar  year  of4  1906  the  road  showed : 

Gross    Earnings $7,752,108 

Net  Earnings 1,786,799 

Fixed    Charges 1,862,797 

Deficit  for  the  year 69,556 

Average  mileage  operated — 1,160. 
Capitalization  per  mile — $30,298. 

Maintenance  of  way  amounted  to  $1,137  and  maintenance  of 
equipment  to  $902,  or  a  total  of  $2,039.  This  on  a  road  earning 
$6,688  per  mile,  with  a  traffic  density  of  only  about  400,000  ton 
miles,  is  very  high  maintenance,  and  probably  represented  an  excess 
for  the  year  of  several  hundred  dollars  per  mile.  The  report  states 
that  included  in  expenses  were  betterments  to  the  amount  of 
$249,555,  and  this  with  new  steel  rail  laid  in  1906  and  other  laid  in 
previous  years,  charged  to  1906  income,  amounted  to  $374,006. 
The  total  betterments  of  1905  amounted  to  $616,877. 

With  practically  no  increase  in  obligations,  the  gross  earnings 
of  1906  increased  $1,213,170.  In  other  words,  it  is  apparent  that 
the  road  has  been  devoting  all  its  surplus  earnings  to  improvements 

(370) 


INTERNATIONAL  &  GREAT  NORTHERN  371 

and  thus  growing  up  to  what  was  originally  an  excessive  capitaliza- 
tion. 

On  the  showing  of  1906  actual  fixed  charges  and  taxes  con- 
sumed 84  per  cent,  of  the  total  net  income,  so  that  the  deficit  shown 
was  created  by  improvements  charged  to  operating  expenses.  This 
means  that  the  underlying  securities  are  growing  in  solidity.  The 
nominal  deficit  for  the  previous  year  amounted  to  $581,465.  Actual- 
ly, the  road  earned  a  slight  surplus  above  its  fixed  charges. 

If  the  actual  surplus  of  1906  be  taken  in  the  neighborhood  of 
$300,000,  this  was  equivalent  to  about  3  per  cent,  on  the  outstanding 
capital  stock.  If  no  heavy  set-back  from  the  tremendous  prosperity 
which  Texas  has  been  enjoying  should  ensue,  it  is  evident  that  the 
securities  of  this  road  should  slowly  increase  in  value.  The  stock  is 
not  quoted  on  the  New  York  Stock  Exchange. 


IOWA  CENTRAL  RAILWAY. 

The  Iowa  Central  is  to  all  intents  a  part  of  the  Minneapolis  and 
St.  Louis.  Although  it  operates  separately,  it  has  practically  the 
same  operating"  officers,  and  very  nearly  the  same  board  of  directors, 
the  two  notable  additions  to  its  directorate  over  that  of  the  Minne- 
apolis and  St.  Louis  being'  Paul  Morton,  president  of  the  Equitable 
Life  Assurance  Society,  and  Theodore  P.  Shonts,  president  of  the 
Interborough. 

The  road  is  a  reorganization  in  1888  of  the  Central  Iowa  Rail- 
road.    Its  main  line  extends  from  Peoria,  111.,  westward  to  Oska 
loosa,  la.,  and  northward  from  there  to  Albert  Lea,  Minn.,  where  it 
joins  the  Minneapolis  and  St.  Louis. 

The  main  business  of  the  road  is  the  haulage  of  coal  and  grain 
from  central  Iowa  eastward  and  northward.  The  gross  earnings  of 
the  road  are  relatively  small,  the  capitalization  is  high,  and  in  the 
two  years  preceding  1906  the  operations  showed  a  deficit  even  after 
very  moderate  maintenance  charges. 

Capitalization. 

Excluding  $3,270,000  of  first  and  refunding  4  per  cent,  bonds, 
held  in  the  treasury,  the  capital  account  of  the  road  on  June  30th, 
1906,  stood  as  follows: 

Common    stock $  8,524,683 

Preferred    stock 5,674,771 

Total    stock $14,199,454 

Funded   debt    (net) 9,270,294 

Loans    1,875,100 

Total   capital $25,344,848 

Total  capital,  per  mile $45,220 

Average   miles  operated 558 

Net  earnings  on  net  capital 3.4% 

Stock  on  net  capitalization 56% 

Fixed  charges  on  total  net  income 79% 

Factor  of  safety 21  % 

(372) 


IOWA  CENTRAL 


373 


It  will  be  seen  from  the  above  estimate  that  the  capitalization 
of  the  road  is  very  heavy  compared  with  its  earnings.  The  average 
capitalization  of  the  Burlington,  the  St.  Paul  and  the  Northwestern 
is  from  $29,000  to  $33,000  per  mile,  with  gross  earnings  between 
$7,000  and  $9,000  per  mile.  This  stands  against  $45,220  per  mile 
for  the  Iowa  Central,  with  gross  earnings  of  $5,300  in  1906.  Tha 
fact  of  over-capitalization  is  further  accentuated  by  the  showing  of 
net  earnings  on  the  net  capitalization.  The  Iowa  Central  showed 
3.4  per  cent,  as  against  9  per  cent,  and  10  per  cent,  for  the  roads 
above  named.  It  is  true  that  stock  represents  a  considerable  part 
of  this  watered  capital,  and  that  on  this  stock  no  dividends  are  being 
paid,  but,  on  the  other  hand,  even  in  the  highly  prosperous  year  of 
1906,  and  with  no  heavy  charges  for  maintenance,  the  fixed  charges 
consumed  very  nearly  80  per  cent,  of  the  total  net  income,  while,  as 
already  stated,  in  the  two  preceding  years  under  the  same  conditions 
a  deficit  was  shown. 

The  practical  Factor  of  Safety,  therefore,  for  the  underlying 
securities  taken  over  an  average  of  three  years  is  about  zero. 

Inasmuch  as  it  is  substantially  a  part  of  the  Minneapolis  and 
St.  Louis  lines,  it  is  not  probable  that  its  interest  payments  would  be 
defaulted  so  long  as  the  latter  road  was  solvent.  Reference  to  the 
analysis  of  the  Minneapolis  shows,  however,  that  the  fixed  charges 
of  that  road  are  likewise  heavy,  and  even  in  1906  consumed  more 
than  three- fourths  of  the  Total  Net  Income. 

Earnings   and   Maintenance. 

The  present  interests  operating  the  road  obtained  control  in 
1900.  The  following  table  shows  the  gross  earnings,  the  traffic 
density  (in  thousands  of  tons  per  mile),  the  maintenance  of  way 
and  of  equipment  per  mile,  and  the  total  expenditure  for  main- 
tenance for  the  six  years  that  have  elapsed  since : 


Year 

Gross 
Earnings 

Traffic 
Density 

Maintenan 
Way 

ce  per  Mile 
Eqpt. 

Total 

1901 

1902 

1903 

1904 

1905 

1906 

$4,514 
4,558 
4,311 
4,260 
4,638 
5,304 

499  (000) 
530     " 
493     " 
520     " 
603      " 
721      " 

$1,249 
976 
930 
504 
735 
726 

$558 
621 
524 
572 
624 
618 

$1,807 
1,597 
1,454 
1,076 
1,359 
1,344 

It  will  be  seen  that  at  the  beginning  of  the  new  administration 
the  rehabilitation  of  the  line  was  charged  to  operating  expenses. 


374  IOWA  CENTRAL 

The  surplus   (or  deficit)   remaining-  after  all  charges  for  the  same 
six  years  has  been  as  follows : 

1900-1  $     7,048 

1901-2  2,915 

1902-3  1,643 

1903-4  81,132  (deficit) 

1904-5  77,074  (deficit) 

1905-6  237,442 

The  surplus  shown  for  1906  was  equivalent  to  4.2  per  cent,  on 
the  preferred  stock.  Only  three  dividends  have  been  paid  on  the 
preferred  since  the  reorganization  in  1888.  It  was  1  per  cent,  in 
1892,  3  per  cent,  in  1899,  V/2  per  cent,  in  1900,  and  none  since. 

The  balance  sheet  on  June  30th,  1906,  showed: 

Current  assets $574,511 

Current    liabilities 436,495 

Leaving  a  working  balance  of $138,016 

The  item  of  cash  was  $267,294. 

Against  loans  and  bills  payable  of  $1,875,000,  the  company  held 
in  its  treasury  $3,270,000  of  its  own  unsold  bonds. 

The  balance  to  credit  of  profit  and  loss  at  the  close  of  the 
year  was  $2,077,314. 

Investment  Value. 

Iowa  Central  stocks  have  shown  wide  fluctuations,  sufficient  to 
show  the  speculative  holder  who  might  have  taken  hold  of  them  at 
something  like  the  lower  figures,  a  very  handsome  profit. 

In  1901,  the  last  year  of  the  dividend  on  the  preferred,  that 
stock  sold  as  high  as  $87  per  share,  and  in  1902,  at  $90  per  share. 
It  was  to  be  had  for  $30  per  share  in  the  following  year,  and  $32 
in  1904.  It  rose  to  $61  in  1905  and  $63  in  1906.  It  slumped  off  to 
$49  in  the  May  decline  of  that  year,  and  to  $30  early  in  1907. 

Similarly  the  common,  which  was  buyable  for  $12  per  share 
in  1900,  sold'at  $51  in  1902,  at  $16  in  1903,  $14  in  1904,  $34  in  1906, 
and  $18  early  in  1907. 

In  all  this  time  there  was  no  material  change  in  the  real  value  of 
this  stock.  In  fact,  both  the  common  and  the  preferred  sold  at 
their  highest  figures  in  a  year  when  the  surplus  had  been  practically 
wiped  out,  and  it  is  to  be  noted  at  very  much  higher  figures  than 
in  1906,  when  the  first  real  surplus  in  six  years  had  been  earned. 
This  is  one  of  the  many  anomalies  to  be  found  in  price  quotations. 


IOWA  CENTRAL  375 

The  simple  fact  is  that  stocks  which  have  intrinsically  little  or  no 
value  are  frequently  boosted  to  high  prices,  more  or  less  by  manipu- 
lative influences,  and  they  fall  back  again  when  this  artificial  sup- 
port is  withdrawn.  This  makes  investment  in  such  stocks  pure 
speculation. 

If,  through  a  generally  highly  prosperous  period  the  road  has 
been  able  to  earn  practically  no  surplus  save  in  the  exceptional  year 
of  1906,  there  seems  little  to  indicate  that  the  road  would  prove  a 
dividend  payer  in  the  near  future.  Its  earnings  per  mile  from  1900 
up  to  1905  were  practically  stationary,  while  those  of  almost  all  the 
other  roads  of  the  country  showed  a  heavy  increase.  From  all  this 
the  speculative  investor  will  probably  conclude  that  on  any  heavy 
general  recession  in  prices,  this  is  a  stock  which  could  be  picked 
up  at  a  low  figure,  and  if  stowed  away  for  safe  keeping  might  show 
a  very  good  profit  when  better  days  came  to  the  stock  market,  and 
the  public  was  in  a  mood  to  invest  in  Governor  Flower's  famous 
"A.  O.  T." 


KANAWHA  AND  MICHIGAN  RAILWAY. 

The  Kanawha  &  Michigan  is  a  small  coal  road  extending  from' 
the  Ohio  River  into  West  Virginia  and  serving  as  a  feeder  to  the 
Hocking  Valley-Toledo  &  Ohio  Central  system.  A  controlling 
interest  in  the  property  was  acquired  by  the  Toledo  &  Ohio  Central 
in  1890,  the  latter  road  being  in  turn  owned  by  the  Hocking  Valley. 
In  1906  it  was  proposed  to  merge  the  Hocking  Valley  and  the 
Kanawha  &  Michigan,  and  under  the  plan  of  consolidation  the  stock- 
holders of  the  Kanawha  &  Michigan  were  to  receive  stock  in  the 
new  company  to  60  per  cent,  of  their  holdings  in  the  old.  This 
consolidation  was  brought  about  largely  as  the  result  of  the  demands 
of  the  minority  shareholders  for  dividends.  A  committee  repre- 
senting these  interests  was  appointed  in  1905,  with  George  D. 
Mackay,  chairman,  to  secure  a  distribution  of  the  considerable  net 
profits  from  the  operations  of  the  company. 

For  a  number  of  years  operating  expenses  have  been  very 
heavily  charged  for  improvements,  the  appropriations  for  mainte- 
nance of  way  in  1906  being  $1,939  per  mile  and  for  equipment 
$3,007  per  mile,  on  the  basis  of  a  freight  traffic  density  of  1,973,883 
ton  miles,  and  a  very  small  passenger  business. 

The  excess  of  maintenance  was  certainly  beyond  $2,000  per 
mile,  which  on  177  miles  of  road  would  have  represented  an  addition 
of  about  $350,000  to  the  nominal  surplus  of  $306,174  shown,  or  the 
equivalent  of  about  7  per  cent,  on  the  outsanding  $9,000,000  of 
capital  stock.  It  is  obvious  from  this  that  a  dividend  of  3  or  4  per- 
cent, might  readily  have  been  paid  in  1906. 

Under  the  proposed  consolidation  the  $9,000,000  of  Kanawha 
&  Michigan  stock  is  exchanged  for  $2,750,000  stock  in  the  new 
company  (the  minority  interest  exchanging  their  stock  on  a  basis  of 
$60  stock  in  the  new  company  for  each  $100  share,  the  controlling 
interest,  representing  $4,510,000  par  value,  held  by  the  Hocking 
Valley,  receiving  only  a  nominal  amount,  $56,000).  On  this  capi- 
talization the  surplus  earnings  of  the  Kanawha  &  Michigan  for  1906 
represented  above  25  per  cent.  If  the  Hocking  Valley's  controlling 
interest   be   reckoned   along  with   the   other  shares,  the   actual   re- 

(376) 


KANAWHA  &  MICHIGAN  377 

duction  of  capital  would  be  to  a  basis  of  $5,400,000,  (i.  e.,  $9,000,000 
of  stock  at  $60  per  share),  on  which  the  Kanawha  &  Michigan  is 
comfortably  earning  12  per  cent.  Either  way,  therefore,  it  will  be 
seen  that  the  consolidation  should  be  highly  profitable  to  the  Hock- 
ing Valley. 

The  Hocking  Valley  has  been  paying  only  3  per  cent.,  so  that 
unless  this  dividend  is  increased,  the  Kanawha  &  Michigan  minority 
holders  will  receive  only  6-10  of  this,  or  1.8  per  cent.,  as  against 
3  or  4  per  cent.,  which  at  the  least  might  reasonably  be  declared 
on  the  stock.  But  there  is  no  law  to  compel  a  controlling  interest 
to  declare  dividends  if  it  is  indisposed,  as  was  evident  in  the  South- 
ern Pacific  case,  and  the  minority  shareholders,  therefore,  probably 
have  the  option  of  accepting  the  proposed  exchange  or  holding  out 
indefinitely  for  better  terms.  Assuming  that  Hocking  Valley  is 
worth  around  par  and  will  pay  satisfactory  dividends  on  this  valua- 
tion— that  is,  for  a  coal  road  from  5  to  6  per  cent.,  it  would  seem 
that  the  Kanawha  stock  were  worth  more  than  the  valuation  of 
$60  per  share.     Sometimes  holding  out  has  been  very  profitable. 


KANSAS  CITY  SOUTHERN  RAILWAY. 

The  Kansas  City  Southern  is  one  of  the  independent  roads  oi 
the  Southwest  which  has  not  yet  come  under  control  of  any  largo 
system.  It  operates  an  almost  air  line  road  from  Kansas  City  to 
Port  Arthur  on  the  gulf,  and  in  1907  was  constructing  a  branch  line 
to  New  Orleans.  The  present  company  is  a  reorganization  of  the 
Kansas  City,  Pittsburg  &  Gulf,  whose  property  was  sold  under 
foreclosure  in  1900.  The  line  had  been  built  by  Arthur  E.  Stillwell, 
the  builder  of  the  Kansas  City,  Mexico  &  Orient  Railway. 

Control  of  the  new  company  was  vested  in  a  voting  trust  con- 
sisting of  John  W.  Gates  of  Chicago,  E.  H.  Harriman,  Herman 
Sielcken,  George  J.  Gould,  James  Stillman,  Louis  Fitzgerald  and 
Otto  H.  Kahn,  of  Kuhn,  Loeb  &  Co.  Mr.  Harriman  was  made 
chairman  of  the  executive  committee. 

This  voting  trust  expired  in  1905,  and  an  entirely  new  manage- 
ment came  into  control,  headed  by  Herman  Sielcken.  The  report 
for  1905  contained  an  elaborate  analysis  as  to  the  condition  of  the 
road  from  various  experts.  It  was  stated  that  25  per  cent,  of  the 
engines  were  in  bad  order  and  65  per  cent,  of  the  freight  equipment 
unfit  for  use  with  freight  demanding  dry  cars  (the  bulk  of  the  south 
bound  business),  and  that  the  road  generally  was  in  very  bad  con- 
dition. 

During  the  six  months  ended  June  30th,  1905,  there  were  715 
wrecks  on  the  line,  and  it  was  estimated  that  $7,000,000  would  be 
required  to  restore  the  line  to  proper  condition. 

The  directorate  of  1906  included  Herman  Sielcken,  chairman ; 
James  A.  Blair  of  Blair  and  Co.,  bankers,  prominently  interested 
in  the  Seaboard  Air  Line ;  Y.  van  den  Berg  of  Ladenburg,  Thalmann 
&  Co.,  H.  Rieman  Duval,  also  a  director  in  the  Seaboard,  Atchison, 
etc. ;  L.  F.  Lorce,  D.  G.  Boissevain,  Walter  T.  Rosen,  Andrew  J. 
Miller,  Plugo  Blumenthal,  William  F  .Harrity,  John  J.  Mitchell, 
Adolphus  Busch,  S.  W.  Fordyce,  J.  A.  Edson  and  George  M.  Craig. 

The  executive  committee  of  1906  consisted  of  L.  F.  Lore'-, 
chairman,   formerly  president  of  the   Baltimore  &  Ohio  and  later 

(378) 


KANSAS  CITY  SOUTHERN  379 

president  of  the  Rock  Island ;  Herman  Sielcken,  H.  Rieman  Duval. 
D.  G.  Boissevain  and  Walter  T.  Rosen. 

Capitalization. 

As  to  June  30th,  1906,  the  capital  account  stood  as  follows : 

Common    stock $30,000,000 

Preferred    stock 21,000,000 

Total    stock $51,000,000 

Funded  Debt 30,000,000 

Notes    2,382,125 

Equipment   Notes 1,968,000 

Total   capital $85,450,125 

Total  capital,  per  mile $103,204 

Average  miles   operated 827 

Net  earnings  on  total  capital 1.9% 

Stock  on  total  capitalization 60% 

Fixed  charges  on  total  net  income 54% 

Factor  of  safety 46% 

It  will  be  seen  that  for  a  road  with  gross  earnings  of  $9,000  per 
mile,  the  average  capitalization  of  $103,204  per  mile  was  for  the 
larger  part  simply  water.  This  average  stands  against  an  average 
of  about  $30,000  per  mile  for  such  standard  roads  as  the  Chicago 
&  North  Western,  the  Burlington,  the  St.  Paul,  etc. 

Even  in  the  extremely  prosperous  year  of  1906,  net  earnings 
showed  only  1.9  per  cent,  on  the  capital  as  against  an  average  of  9 
per  cent,  and  10  per  cent,  for  the  roads  just  named.  Of  this  large 
capital,  however,  60  per  cent,  was  stock  on  which  no  dividends  had 
ever  been  paid  up  to  1906  and  on  which  little  had  ever  been  earned. 

Fixed  charges  in  1906  consumed  54  per  cent,  of  the  total  net  in- 
come, leaving  a  comfortable  margin  of  safety  for  the  underlying 
securities.  Since  the  first  year  of  the  reorganization  the  funded  debt 
has  increased  about  eight  millions  and  a  half,  the  stock  not  at  all, 
and  in  the  meantime  gross  earnings  have  risen  by  nearly  80  per  cent. 
This  is  an  excellent  showing,  and  could  it  be  continued  it  would 
amply  sustain  dividends  on  the  preferred. 

The  Kansas  City  Southern  owns  all  the  stock  of  the  Port  Arthur 
Canal  &  Dock  Company,  the  Kansas  City,  Shreveport  &  Gulf  Ter- 
minal Company  and  the  Arkansas  Western  Railway  Company.    The 


380 


KANSAS  CITY  SOUTHERN 


earnings  of  these  are  small  and  the  road  has  no  other  equities  in 
other  companies. 

Character  and  Stability  of  Traffic. 

In  1906  the  tonnage  of  the  road  was  made  up  of  19  per  cent, 
farm  products,  18  per  cent,  mine  products,  45  per  cent,  forest  pro- 
ducts, balance  miscellaneous.  The  average  rate  received  is  low 
for  a  road  in  this  section,  amounting  to  .68  cents  in  1906  as  against 
.73  cents  in  1905.  From  the  year  of  the  reorganization  the  earnings 
have  compared  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1899-0 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

833 
833 
833 
839 
839 
839 
827 

$4,118,763 
4,753,066 
5,450,871 
6,010,458 
6,450,320 
6,893,656 
7,568,332 

$4,944 
5,705 
6,543 
7,164 
7,688 
8,216 

1905-6 

9,151 

Maintenance. 

The  traffic  density  of  the  road  has  risen  rapidly,  increasing 
about  50  per  cent,  in  six  years.  In  the  meantime  maintenance 
charges  have  increased  nearly  65  per  cent.,  the  items  standing  as 
follows : 


Maintenance  per  Mile 

Year 

Traffic  Density 

Total 

Way 

Equipment 

1900-1 

685,733 

$844 

$748' 

$1,592 

1901-2 

711,687 

839 

919 

1,758 

1902-3 

795,912 

1,053 

1,166 

2,219 

1903-4 

882,913 

878 

1,227 

2,105 

1904-5 

887,077 

967 

1,445 

2,412 

1905-6 

1,061,114 
837,406 

1,185 

1,431 

2,616 

Average 

$961 

$1,156 

$2,117 

M.  K.  &  T...  . 

495,226 

1,121 

616 

1,737 

St.  L    &  S.  F. 

448,625 

814 

703 

1,517 

St.  L.  &  S.  W. 

408,066 

1,023 

674 

1,697 

Atchison 

577,005 

1,123 

1,113 

2,236 

A  road  in  the  condition  descrihed  in  the  report  of  1905  was 
undoubtedly  in  need  of  much  heavier  maintenance  than  might  other- 
wise have  been  required  on  a  well-equipped  road.     From  the  com- 


KANSAS  CITY  SOUTHERN 


381 


parison  below  it  will  be  seen  that  with  an  average  traffic  density  of 
at  least  50  per  cent,  more  than  that  of  the  Atchison,  the  average  ex- 
penditures were  about  the  same  in  1906.  The  average  of  the  Louis- 
ville &  Nashville,  of  the  same  traffic  density,  was  nearly  50  per 
cent,  higher.  In  1906  the  traffic  density  and  expenditures  of  several 
roads  compared  as  follows : 


M  K.  &T.... 
Missouri  Pac .  . 
Rock  Island .  . 

Atchison 

Louis.  &  Nash. 

Kans.  City  So. 


Traffic  Density 


460,359 
668,791 
514,767 
692,604 
950,304 

1,061,114 


Maintenance  per  Mile 


Way 


$1,231 

857 

1,011 

1,477 

1,583 

1,185 


Equipment 


$671 
921 
923 

1,271 

1,886 

1,431 


Total 


1 

$1,902 
1,778. 
1,934 
2,748 
3,469 

2,616 


While,  therefore,  the  maintenance  of  1906  appears  liberal  as 
compared  with  that  of  the  Missouri  Pacific,  it  is  not  high  as  com- 
pared with  the  Missouri,  Kansas  &  Texas  and  more  prosperous 
roads,  and  it  is,  to  an  extent,  deceptive ;  in  fact,  a  road  in  better 
condition  could  hardly  have  been  maintained  on  a  lower  basis. 

The  traffic  density  for  1906,  including  company  freight,  was 
actually  1,200,985,  this  heavy  company  tonnage  being  occasioned  bv 
the  extensive  improvements  going  on.  The  cost  of  this  company 
tonnage,  the  report  states,  was  charged  to  operating  expenses. 

The  improvements  contemplated  in  the  report  of  1905  involved 
the  expenditures  in  1906  of  $1,226,576  for  the  road  and  $2,341,779 
for  additional  equipment,  or  about  half  of  the  $7,000,000  estimated 
as  required  to  put  the  road  in  proper  condition. 

Surplus  Earnings. 

On  the  basis  of  the  maintenance  charges  shown  above,  the  sur- 
plus for  six  years  has  been  as  follows  : 


Year 

Surplus 

Per  cent. 
Earned  on 
Preferred 

Average 

Price 
Common 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

$448,866 
916,335 
652,370 
853,023 
735,212 
933,055 

2.2 

4. 

3.2 

4.2 

3.6 

4.6 

19 
29 
26 
24 
29 

1905-6 

29 

382  KANSAS  CITY  SOUTHERN 

The  Balance  Sheet. 

Including  $125,437  investments  in  marketable  securities  and 
$359,514  temporary  investments  in  assets  set  aside  for  improvements, 
the  balance  sheet  as  of  June  30th,  1906,  showed : 

Current  assets $1,578,435 

Current  liabilities 1,468,439 

Leaving  a  working  balance  of $109,996 

The  item  of  cash  was  $221,946,  and  there  was  in  addition  a  net 
of  cash  and  materials  for  improvements  on  hand  of  $530,590,  not  in- 
cluded in  the  above  estimate.  The  amount  to  credit  of  profit  and 
loss  was  $943,629. 

It  will  be  seen  that  the  company  was  not  very  well  supplied  with 
working  capital. 

Investment  Value. 

The  preferred  stock  is  limited  to  non-cumulative  dividends  of 
4%  per  annum.  By  reference  to  the  table  above  it  will  be  seen  that 
in  three  of  the  six  years  under  view,  this  4%  was  nominally  earned 
on  the  preferred.  For  the  first  half  of  the  fiscal  year  of  1907  the 
company  has  made  heavy  gains,  indicating  a  surplus  available  for 
dividends  of  about  twice  that  of  the  preceding  year  and  a  4%  divi- 
dend has  been  declared.  The  policy  of  this  dividend  seems  doubtful. 
The  territory  covered  by  the  Kansas  City  Southern  has  been  enjoy- 
ing a  remarkable  boom  and  the  road  has  profited  thereby.  If  this 
improvement  could  be  maintained  it  would  be  ample  to  sustain 
dividends  on  the  preferred,  but  it  would  be  astonishing  if  this  rapid 
growth  should  continue.  The  stock  sold  as  high  as  $71  per  share 
in  1906,  declining  to  $45  in  March  of  1907.  Were  earnings  not  to 
fall  off  it  would  represent  an  attractive  purchase  somewhere  be- 
tween these  figures  to  those  who  are  willing  to  wait.  A  limited  4% 
stock  under  the  high  interest  rates  of  1906-7  would  not  tend,  how- 
ever, to  sell  above  $75,  even  under  favorable  conditions. 

After  this  review  it  is  needless  to  add  that  the  large  amount 
of  common  stock  is  a  pure  speculation,  and  that  dividends  are 
scarcely  likely  for  some  years  to  come.  It  belongs  to  the  class  of 
stocks  which  are  run  up  and  down  according  to  the  state  of  the 
market,  selling  as  high  as  ^>S7  per  share  in  1906  and  declining  to 
$18  per  share  in  March,  1907,  in  the  face  of  an  astonishing  increase 
in  the  earnings  of  the  road  within  the  same  time.  This  is  one  of 
the  vagaries  of  the  stock  market,  and  indicates  that  it  is  general  con- 


KANSAS  CITY  SOUTHERN  383 

ditions  rather  than  values  that  determine  the  price  of  such  stocks. 
Obviously,  then,  it  might  sell  at  very  low  prices  under  severe  money 
conditions,  and  if  picked  up  then  and  held  for  a  general  rise  in  the 
market  it  would  undoubtedly  represent  a  handsome  profit  to  the 
investor.  The  road  is  not  in  the  remotest  danger  of  a  receivership, 
even  under  a  heavy  recession  of  business,  and  the  stock  should  in 
time  represent  solid  value.  Meanwhile,  both  the  common  and  pre- 
ferred might  readily  be  sought  for  the  purpose  of  control  by  some 
large  company,  so  that  they  might  tend  to  sell  at  higher  figures  than 
otherwise. 


LAKE  ERIE  AMD  WESTERN  RAILROAD. 

The  Lake  Erie  and  Western  is  another  feeder  of  the  Lake 
Shore,  occupying  much  the  same  territory  and  partially  paralleling 
the  Big  Four.  It  is  a  small  road,  operating  886  miles.  The  majority 
of  its  capital  stock,  $5,930,000  par  value  of  preferred  and  an 
equal  amount  of  the  common,  is  owned  by  the  Lake  Shore.  The 
present  company  was  organized  in  1887  to  take  over  the  property  of 
the  Lake  Erie  &  Western  Railway,  sold  under  foreclosure  the  year 
before.  The  Northern  Ohio  Railroad  is  leased  for  999  years,  but 
the  results  from  its  operation  were  not  included  in  the  income  before 
1900.  The  Lake  Erie  and  Western  owns  the  entire  capital  stock 
of  this  road,  and  guarantees  its  bonds  as  to  principal  and  interest. 

The  control  of  the  road  passed  to  the  Vanderbilts  in  1899,  and 
the  directorate  was  made  up  of  representatives  of  the  New  York 
Central-Lake  Shore,  and  its  executive  officers  are  the  same  as  for  the 
latter. 

Capitalization. 

The  capital  account  January  1,  1907,  stood  as  follows: 

Common  stock $11,840,000 

Preferred  stock  11,840,000 

Total   $23,680,000 

Funded  debt 10,875,000 

Northern  Ohio 2,500,000 

Total  capital $37,055,000 

Total  capital,  per  mile $41,774 

Average   miles  operated 886 

Net  earnings  on  net  capital 3.9% 

Stock  on  total  capitalization 64% 

Fixed  charges  on  total  net  income 69% 

Factor  of  safety 31% 

(384) 


LAKE  ERIE  &  WESTERN 


385 


The  stock  is  obviously  rather  diluted,  since  the  net  earnings 
show  only  3.9%  on  the  estimated  net  capitalization.  This  is  against 
an  estimate  of  about  8.8%  for  the  Michigan  Central  and  12.7%  for 
the  Lake  Shore.  The  entire  amount  of  the  common  stock  is  pure 
inflation,  since  no  surplus  is  earned  to  provide  it  with  dividends,  and 
even  if  this  amount  ($11,840,000)  were  eliminated  the  net  earnings 
would  still  have  shown  only  5.2%  on  the  capitalization. 

In  1906  fixed  charges  consumed  nearly  70%  of  the  total  net 
income,  leaving  a  margin  of  safety  for  the  underlying  debt  of  only 
about  30%.  On  the  other  hand  the  stock  represents  64%  of  the 
estimated  net  capitalization. 

The  bonded  debt,  including  $2,500,000  of  the  Northern  Ohio 
5%  bonds  guaranteed  by  the  company,  amounts  to  $15,000  per 
mile,  on  a  road  with  a  traffic  density  of  between  six  and  seven  hun- 
dred thousand  ton-miles  per  mile  of  road. 

Neither  the  capital  stock  nor  the  funded  debt  has  increased 
within  the  last  ten  years,  save  by  the  assumption  of  $2,500,000  of  the 
Northern  Ohio  bonds.  Gross  earnings  have  increased  about  50%, 
though  part  of  this  is  due  to  the  inclusion  of  the  Northern  Ohio 
since  1901.    For  a  series  of  years  the  earnings  show  as  follows: 


Year 

1897 

1898 

1899 

1900 

1901* 

1902 

1903 

1904 

1905 

1906 


Miles 
Operated 


Gross 
Earnings 


Per 

Mile 


$3,326,587 
3,353,162 
3,787,301 
4,284,780 
4,533,204 
4,669,340 
5,218,728 
4,998,010 
5,037,294 
5,212,811 


$4,588 
4,625 
5,223 
5,910 
5,110 
5,298 
5,884 
5,634 
5,679 
5,883 


*  Includes  Northern  Ohio  Railway. 

Maintenance. 

The  maintenance  charges  averaged  about  $400  per  mile 
less  than  the  Grand  Rapids  &  Indiana,  for  example,  with  a  lower 
average  traffic.  In  1906,  with  a  slightly  lower  traffic,  the  Lake  Erie 
charges  were  nearly  $1,000  per  mile  less  than  the  Grand  Rapids  road. 
This  difference  would  have  been  sufficient  to  wipe  out  the  nominal 
surplus  shown  in  both  1905  and  1906.  It  is  to  be  noted  further  that 
in  1906,  with  somewhat  increased  traffic  density,  there  was  a  decrease 
of  about  $200  per  mile  in  the  total  maintenance  from  the  average  of 
the  three  years  preceding. 

25 


386 


LAKE  ERIE  &  WESTERN 


It  is  improbable,  therefore,  that  the  maintenance  charges  of 
1906  represented  any  concealed  earnings. 

Besides  the  regular  maintenance  charges  small  sums  have  been 
set  aside  for  several  years  for  improvements,  namely,  $44,657  in 
1904,  $70,138  in  1905  and  $87,092  in  1906. 

The  maintenance  charges  have  been  as  follows : 


Maintenance  per  Mile 

Total 

Way            Equipment 

1900 

660,843 
568,812 
514,897 
578,387 
608,677 
622,830 
662,364 

$1,113 
1,064 
1,030 
974 
979 
833 
739 

$575 
588 
599 
928 
823 
986 
919 

$1,688 

1901* 

1902 

1,652 
1,629 

1903 

1,902 

1904 

1,802 

1905 

1,819 

1906 

1,658 

Average 

602,401 

$961 

$774 

SI, 735 

G   R.  &I 

Vandalia  (2  yr) 

533,936 
887,411 

1,127 
1,290 

1,041 
1,802 

2,168 
3,092 

*  Includes  Northern  Ohio  Railway. 

Surplus  Earnings. 

From  1900  the  surplus  earnings  have  shown  as  follows : 

1900    $716,168 

1901    •  • 505,196 

1902    484,165 

1903   •  • 489,010 

1904   366,489 

1905    •• 443,651 

1906    450,160 

This  was  equivalent  to  about  4%  on  the  amount  of  preferred 
stock  outstanding. 

The  preferred  stock  is  entitled  to  6%  non-cumulative  dividends. 
In  1906  the  dividend  on  the  preferred  was  raised  to  4%,  and  in  order 
to  pay  this,  the  maintenance  charges  were  somewhat  reduced,  as 
noted  above. 

The  Balance  Sheet. 

As  of  December  31st,  1906,  the  balance  sheet  showed : 

Current  assets  •  • $637,383 

Current  liabilities 1,961,527 


Leaving  a  debit  balance  of $1,324,144 


LAKE  ERIE  &  WESTERN  387 

The  amount  of  cash  on  hand  was  $222,491  and  the  balance  to 
credit  of  profit  and  loss  $222,417. 

The  company  was  obviously  not  well  provided  with  working- 
capital.  During  the  year  there  was  charged  to  profit  and  loss  on 
account  of  new  equipment  purchased,  $210,270,  and  for  adjustment 
of  taxes  and  reduction  in  value  of  assets,  $131,158. 

Investment  Value. 

The  preferred  stock,  then  paying  3%,  sold  up  as  high  as  $138 
in  1902.  There  was  nothing  in  the  prospects  of  the  road,  nor  in  the 
subsequent  performances  to  justify  such  a  price.  The  control  of 
the  road  is  owned  absolutely  by  the  Lake  Shore,  so  that  the  stock 
has  no  other  value  than  as  an  investment.  It  sold  down  to  $85  in 
1904.  In  1906  it  reached  $92,  declining  in  the  spring  of  1907  to  $55 
per  share.  This  was  in  the  face  of  the  fact  that  the  dividend  had 
been  increased  to  4%.  It  is  obvious,  therefore,  that  increasing  the 
dividend  of  a  stock  in  an  over-capitalized  road,  when  that  road  is  in 
need  of  working  capital,  and  that  in  order  to  pay  this  dividend  it  is 
needful  somewhat  to  reduce  the  standard  of  maintenance  of  previous 
years,  tends  to  lower,  rather  than  raise,  the  price  of  a  stock,  even 
though  it  be  the  stock  of  a  Vanderbilt  road.  Although  the  preferred 
is  entitled  to  6%,  it  is  doubtful,  in  view  of  the  earnings  in  the  pros- 
perous years  of  1900-1906,  if  any  additional  dividend,  above  the 
4%  can  be  expected ;  the  circumstances  under  which  the  stock  was 
raised  from  3  to  4%,  have  already  been  fully  set  forth. 

Aside  from  its  value  for  "control,"  the  Lake  Erie  &  Western 
common  apparently  finds  its  chief  utility  as  a  stock  market  plaything. 
This  stock  never  has  had,  and  scarcely  seems  likely  to  have,  any 
other  "value."  And  yet  in  the  boom  years  of  1901-2  it  was  run  up  on 
the  Stock  Exchange  to  $72  per  share.  This  meant  manipulation  and 
nothing  more.  The  stock  sold  down  to  $23  in  1903  and  in  1906  was 
lifted  to  $44.  In  March,  1907,  it  sold  at  $19  per  share.  There  seems 
little  likelihood  that  this  stock  will  earn  a  dividend  for  many  years 
to  come.  The  road  earns,  with  no  great  ease,  the  4%  on  its  pre- 
ferred, and  the  preferred  is  entitled  to  6%  before  the  common  re- 
ceives any.  Inasmuch,  therefore,  as  the  control  of  the  road  is 
owned  outright  by  the  Lake  Shore,  the  common  stock  outstanding 
has  a  paper  value  and  little  more. 


LAKE  SHORE  AND  MICHIGAN  SOUTHERN 

RAILWAY. 

The  Lake  Shore,  as  it  is  commonly  known,  is  the  chief  sub- 
sidiary road  of  the  New  York  Central  system,  and  it  is  likewise  the 
principal  holding  company  for  the  New  York  Central's  interests  in 
other  lines.  Like  the  Michigan  Central,  it  carries  the  New  York 
Central's  traffic  westward  from  Buffalo  to  Chicago,  operating  a 
total  of  1,520  miles,  with  840  miles  of  second,  third  and  fourth  track. 
It  has  long  been  a  Yanderbilt  road,  and  in  1898  the  larger  part  of 
its  stock  was  exchanged  for  New  York  Central  collateral  3J^%  gold 
bonds  at  the  rate  of  $200  per  share  for  the  capital  stock.  At  the 
last  report.  $45,267,000  out  of  $50,000,000  of  the  share  capital  had 
been  so  exchanged,  or  90%  of  the  total.  The  road  paid  a  dividend 
of  10%  in  1906,  so  that  the  dividend  much  more  than  pays  the 
interest  on  the  bonds. 

The  directorate  of  the  Lake  Shore  includes  eight  of  the  New 
York  Central's  directors,  with  the  Central's  president  and  senior 
vice-president,  W.  H.  Newman  and  William  C.  Brown,  and  also 
W.  K.  Vanderbilt,  Jr.,  and  W.  Seward  Webb.  The  chief  operating 
officers  of  the  road  are  the  same. 

Capitalization. 

The  stock  capital  of  the  Lake  Shore  has  remained  unchanged 
since  1871  and  nothing  has  been  charged  to  equipment  and  construc- 
tion accounts  since  1883.  In  1906  the  Lake  Shore  paid  in  rentals 
of  leased  lines,  $1,450,186.  Capitalizing  this  on  a  4%  basis  the 
capital  accounts  of  the  road,  January  1st,  1907,  stood  as  follows: 

Common  stock •  • $49,466,500 

Guaranteed  stock  (107^) 533,500 

Total   $50,000,000 

Funded  debt  .  . .  •  • 135,000,000 

Assumed  debt   404,000 

(388) 


LAKE  SHORE  &  MICHIGAN  SOUTHERN  389 

Total  capital    $185,404,000 

Rentals  capitalized  at  4% 36,254,650 

Approximate  gross  capitalization $221,658,650 

Securities    held 101,597,230 

Approximate  net  capitalization $120,061,420 

Approximate  net  capital  per  mile $78,987 

Average  miles  operated 1,520 

Net  earnings  on  net  capital 12.7% 

Stock  on  net  capitalization 41% 

Fixed  charges  on  total  net  income 38% 

Factor    of    safety 62% 

Included  in  the  item  of  "securities  held"  was  real  estate  not  used 
in  operation  of  the  road,  valued  at  $438,661,  and  advances  to  lessor 
and  other  companies  amounting  to  $8,411,403. 

The  estimate  of  $78,987  net  capital  per  mile  stands  against  a 
similar  estimate  of  $123,188  for  the  New  York  Central,  $42,796  for 
the  Michigan  Central,  $69,150  for  the  Wabash,  and  $104,311  for  the 
Pittsburg,  Cincinnati,  Chicago  &  St.  Louis. 

Net  earnings  for  1906  showed  12.7%  on  the  estimated  net 
capital  against  similar  estimates  of  5.8%  for  the  New  York  Cen- 
tral, 11.4%  for  the  Michigan  Central,  3.9%  for  the  Wabash,  and 
6.6%  for  the  Panhandle. 

It  will  be  seen  that  the  stock  represents  41%  on  the  estimated 
net  capitalization  and  that  fixed  charges  in  1906  consumed  38% 
of  the  total  net  income,  including  in  the  latter  item  $5,400,000 
charged  to  operating  expenses  for  new  construction  and  new  equip- 
ment. This  stands  against  a  similar  estimate  of  64%  for  the  New 
York  Central,  38%  for  the  Pennsylvania,  38%  for  the  Lackawanna 
and  71%  for  the  Wabash.  The  Factor  of  Safety  on  the  underlying 
securities  was,  therefore,  large. 


Equities  Owned. 

The  Lake  Shore  is  one  of  the  largest  railroad  holding  com- 
panies, owning  a  controlling  interest  in  the  New  York,  Chicago  & 
St.  Louis  (Nickel  Plate),  the  Cleveland,  Cincinnati,  Chicago  &  St 
Louis,  the  Lake  Erie  &  Western,  the  Chicago,  Indiana  &  Southern, 
the  Pittsburg  &  Lake  Erie,  and  other  small  roads.  The  $30,000,000 
of  stock  in  the  Reading  road  owned  by  the  Lake  Shore,  with  an 
equal  amount   owned   by  the  Baltimore  &  Ohio,   carries   working 


390  LAKE  SHORE  &  MICHIGAN  SOUTHERN 

control  of  the  Reading  ($60,000,000  out  of  a  total  of  $140,000,000), 
and  the  Reading,  in  turn,  has  absolute  control  of  the  Central  of  New 
Jersey.  Practical  control  of  the  Lehigh  Valley  is  shared  with  the 
Reading  (owning  $1,000,000,  par  value),  the  Central  of  New  Jersey 
(owning  $1,600,000,  par  value),  the  Lackawanna  and  the  Erie;  and 
the  Lake  Shore  is  one  of  five  roads  which  now  control,  and  under 
the  scheme  of  reorganization  will  have  absolute  control,  of  the  Hock- 
ing Valley.    The  principal  items  of  its  holdings  stand  as  follows : 

,  Par  Value. 

Chicago,    Indiana    &    Southern,  preferred $  5,000,000 

common    12,000,000 

first  mortgage  bonds.  7,000,000 

Cleveland,    Cincinnati,    Chicago   &    St.    Louis 23,148,100 

Hocking    Valley    Railway 1,154,000 

Lake  Erie  &  Western,  preferred 5,930,000 

common 5,940,000 

Lehigh  Valley  Railroad   Company 5,700,000 

New  York,  Chicago  &  St.  Louis,    1st  preferred 2,500,000 

2nd    preferred 6,275,000 

common 6,240,000 

Pittsburgh  &  Lake  Erie  Railroad  Company 5,000,100 

Reading  Company,  1st  preferred 6,065,000 

2nd    preferrel 14,265,000 

common 10,002,500 


«  « 


The  total  of  $132,213,100,  par  value  of  stocks  and  bonds  owned, 
is  carried  on  the  books  of  the  company  at  a  cost  of  $92,747,166.  On 
these  investments  the  company  received  in  1906  $4,153,505,  equiva- 
lent to  4.4%  on  the  book  valuation. 

The  Lake  Shore's  largest  single  equity  was  in  the  Pittsburgh 
&  Lake  Erie.  In  1906  that  extraordinary  road  earned  nominally 
25%  on  its  capital  stock  and  actually  75%,  if  the  sums  charged  to 
operating  expenses  for  new  construction  and  equipment  be  added 
to  the  nominal  surplus.  Only  11%  dividends  were  paid  in  1906, 
leaving  a  nominal  equity  of  14%  on  the  capital  stock,  and  actually, 
on  the  most  conservative  basis,  about  30%.  The  Lake  Shore's  equity 
(one-half)  in  the  road's  earnings  for  the  year  was  therefore  nom- 
inally $700,000,  and,  actually,  at  least  two  or  three  times  this  sum. 

The  Reading  Company  earned  in  1906  nearly  14%  on  its  com- 
mon stock  and  paid  4%.  It  could  easily  have  paid  6%,  which  would 
have  yielded  the  Lake  Shore  $200,000  additional  income. 

There  were  other  equities  of  considerable  value  in  other  com- 
panies, so  that  the  actual  value  of  the  Lake  Shore's  holdings  were 


LAKE  SHORE  &  MICHIGAN  SOUTHERN 


391 


considerably  in  excess  of  the  amount  at  which  they  were  carried  on 
the  books  of  the  company. 

Increase  of  Capitalization. 

In  consequence  of  large  purchases  of  securities  in  other  lines, 
the  Lake  Shore,  like  the  Pennsylvania  and  some  other  large  holding 
companies,  shows  the  anomalous  result  of  having  increased  its  capi- 
tal within  recent  years  much  more  rapidly  than  its  gross  earnings. 
Since  1900  the  showing  is  as  follows : 


Year 

Common 
Stock 

Funded 
Debt 

.     Total 

Capital 

Gross 
Earnings 

1900 

$50,000,000 
50,000,000 

$50,325,000 
135,404,000 

$100,325,000 
185,404,000 

$26,466,513 

190G 

42,544,378 

Increase  over  six  years:    Total  capital,  85%;    gross  earnings,  61%. 

In  the  same  period  the  book  value  (cost)  of  the  securities 
owned  increased  from  $26,878,782  to  $92,747,166,  or  an  increase 
in  holdings  of  about  $66,000,000.  If  this  be  deducted  from  the  $85,- 
000,000  increase  in  capital,  it  will  be  seen  that  the  actual  increase 
in  the  capitalization  of  the  road  proper  was  only  about  19%,  while 
in  the  same  period  the  earnings  of  the  road  increased  61%. 

It  is  this  result  on  an  already  highly  profitable  road  which  has 
given  such  high  value  to  Lake  Shore  stock. 

In  1906,  $35,000,000  of  the  authorized  issue  of  $50,000,000  4% 
gold  bonds  were  sold,  and  with  this  there  was  purchased  $4,395,400 
par  value  of  the  stock  of  the  C.  C.  C.  &  St.  Louis,  $1,154,000  par 
value  of  the  Hocking  Valley,  16,922  shares  of  the  Merchants  Des- 
patch Transportation  Company,  and  $7,000,000  of  the  bonds  of  the 
Chicago,  Indiana  &  Southern  Railroad.  The  company  also  sold 
$5,000,000  par  value  of  stock  of  the  Illinois,  Indiana  &  Iowa  Rail- 
road, acquiring  in  its  stead  stock  of  the  newly  organized  Chicago, 
Indiana  &  Southern. 

Stability  and  Character  of  Earnings. 

Nearly  three-quarters  of  the  Lake  Shore  earnings  are  from 
freight,  passenger  earnings  contributing  a  little  over  20%.  Of  the 
33,000,000  tons  of  freight  moved  in  1906,  mine  products  contributed 
nearly  one-half,  ore  and  bituminous  coals  being  the  largest  items. 
The  balance  was  distributed  over  a  wide  variety  of  traffic. 

The  solid  and  steady  growth  in  the  road's  earning's  are  revealed 
in  the  following  table : 


392 


LAKE  SHORE  &  MICHIGAN  SOUTHERN 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896 

1897 

1,440 
1,437 
1,413 
1,413 
1,411 
1,411 
1,411 
1,430 
1,453 
1,520 
1,520 

$20,193,958 
20,297,722 
20,753,683 
23,013,946 
26,466,514 
29,272,675 
30,449,292 
34,768,082 
35,161,053 
38,600,809 
42,544,378 

$14,021 
14,128 

1898 

14,715 

1899 

1900 

16,707 
18,757 

1901. 

20,746 

1902 

1903 

1904 

1905 

21,577 
24,307 
24,198 
25,395 

1906 

27,989 

The  Lake  Shore's  average  freight  earnings  of  .52c.  per  ton  mile 
in  1906  were  rather  low,  but  the  average  load  per  train  mile  was  high 
—624  tons  of  revenue  freight — so  that  the  earnings  per  train  mile 
amounted  to  $3.25. 

Maintenance. 

For  years  the  Lake  Shore's  operating  expenses  have  been  heav- 
ily charged  for  improvements,  but  this  fact  has  been  especially 
notable  from  1903,  as  the  following  table  discloses : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900 

1901 

1902 

2,566,144 
2,839,506 
2,872,786 
3,224,272 
3,160,358 
3,355,209 
3,698,357 

$2,197 
2,404 
4,256 
5,515 
4,172 
5,337 
6,278 

$2,874 
4,184 
2,913 
3,688 
4,898 
5,464 
4,634 

$5,071 
6,588 
7,169 

1903 

1904 

9,203 
9,070 

1905. , 

10, S01 

1906 

10,912 

Average.  .  .  . 

3,102,376 

$4,308 

$4,093 

$8,401 

Panhandle.  .  .  . 

Penn.  Co 

Erie 

2,193,454 
3,246,341 
2,434,819 

2,567 
3,314 
1,861 

3,680 
4,139 
3,216 

6,247 
7,453 
5,077 

Miles  of  extra  track.  840. 

The  amounts  given  above  are  the  total  expenditures  for  mainten- 
ance and  improvements.  Beginning  with  1905  the  improvement 
items  were  separately  entered,  and  for  a  basis  of  comparison  with 
other  roads  which  charge  off  expenditures  separately,  the  expendi- 
tures for  bare  maintenance  are  given  below  for  two  years : 


Traffic  Density 

Way 

Equipment 

Total 

1905    . 

3,355,209 
3,698,357 

$2,875 
3,501 

$3,253 
3,844 

$6,128 

1906 

7,345 

LAKE  SHORE  &  MICHIGAN  SOUTHERN  393 

Improvements  from  Earnings. 

Included  in  the  sums  devoted  to  maintenance,  from  which  the 
mileage  average  in  the  first  table  has  been  made  up,  were  the  follow- 
ing sums  charged  to  operating  expenses  for  new  construction  and 
new  equipment : 

1900   $3,071,999 

1901  4,186,143 

1902  4,192,461 

1903  6,315,276 

1904  5,557,236 

1905  6,720,793 

1906  5,423,722 


$35,467,630 


This  is  an  average  of  $23,333  per  mile  for  the  road  as  operated 
in  1906  and  stands  against  similar  appropriations,  for  example,  of 
$17,217  per  mile  for  the  Pennsylvania  for  eight  years,  and  $42,885 
per  mile  for  the  Lackawanna  for  six  years. 

Surplus  Earnings. 

In  the  following  table  the  surplus  shown  is  after  charging  out 
the  improvements  noted  in  the  table  above ;  that  is,  the  items  show 
the  nominal  surplus  given  in  the  reports.  The  items  compare  as 
follows : 


Year 


Surplus 


1900 
1901 
1902 
1903 
1904 
1905 
1906 


$6,658,431 
7,155,125 
6,735,523 
4,471,032 
4,457,741 
4,467,964 
6,486,612 


Per  cent. 

Earned  on 

Common 

13.3 

14.2 

13.4 

8.9 

8.9 

8.9 

12.9 


Dividends 

Paid  on 

Common 


8 
8 
8 
8 
8 
8 
10 


Average 
Price 


218 
272 
333 
293 
267 
319 
317 


It  will  be  seen  that  as  a  result  of  heavy  charges  for  improve- 
ments the  surplus  after  1901  showed  a  decrease  in  the  face  of  a  large 
increase  in  earnings.  The  actual  surplus  obtained  by  adding  in  the 
amount  shown  in  the  table  above  and  the  amounts  expended  for 
improvements  for  four  years  have  been  as  follows : 


394  LAKE  SHORE  &  MICHIGAN  SOUTHERN 

1903 $10,786,308 

1904 10,015,975 

1905 11,571,756 

1906 11,909,354 

Thus  it  will  be  seen  that  while  the  nominal  surplus  for  1906 
showed  only  12.9%  on  the  capital  stock,  the  actual  surplus  earnings 
of  the  road  were  around  23.8%. 

Dividend  Payments. 

The  following  table  shows  the  dividend  payments  over  a  series 
of  years : 

% 
1871-2 8 

1873    4 

1874    314 

1875    2 

1876    3i/4 

1877    2 

1878    4 

1879    6y2 

1880-3 8 

1884    7 

1885-6 — 

1887-8 4 

1889-90 5 

1891-2 6y2 

1893-7 6 

1898    6V2 

1899-03 7 

1904-5 8 

1906    10 

In  December,  1906,  the  stock  was  put  on  a  12%  basis. 

The  Balance  Sheet. 

As  of  June  30th,  1906,  the  balance  sheet  showed : 

Current  assets  of $18,223,457 

Current  liabilities  of 11,342,528 

Leaving  a  working  balance  of $  6,880,929 

The  item  of  cash  on  hand  was  $4,938,938,  and  the  balance  to 
credit  of  profit  and  loss  was  $17,298,529. 


LAKE  SHORE  &  MICHIGAN  SOUTHERN  395 

Investment  Value. 

Only  a  very  small  amount  of  Lake  Shore  stock  is  outstanding 
and  sales  are  rare.  In  1906  only  two  quotations  are  shown,  for  $3J30 
and  $335  per  share.  On  a  12%  basis,  at  the  latter  figure  the  stock 
yields  3.5%  flat.  If  the  total  surplus  for  1906  were  divided  equally 
between  improvements  and  dividends,  somewhat  after  the  Penn- 
sylvania fashion,  this  would  have  left  11%  for  the  stock,  so  that  at 
the  quotations  given  above,  the  stock  does  not  represent  anything 
very  attractive  to  the  investor,  for  while  the  Lake  Shore  is  undoubt- 
edly a  magnificent  property,  its  solidity  for  the  investor  is  discounted 
by  the  value  put  upon  its  stock. 


LEHIGH  VALLEY  RAILROAD. 

The  Lehigh  Valley  is  one  of  the  big  "coalers,"  like  the  Reading 
and  the  Lackawanna,  owning  vast  fields  of  anthracite  coal,  and 
whose  chief  business  is  getting  this  coal  to  market. 

About  85%  of  its  coal  traffic  originates  from  properties  owned  or 
controlled  by  the  company  itself.  It  operates  a  double  track  line  of 
railroad  from  New  York  through  the  anthracite  coal  fields  of  Penn- 
sylvania, to  Buffalo,  with  numerous  branches. 

The  Lehigh  Valley  was  organized  as  a  Pennsylvania  company 
as  far  back  as  1847.  Its  main  line  was  completed  in  1855.  The 
Easton  &  Amboy  Railroad,  in  New  Jersey,  now  operated  as  a  part 
of  the  main  line,  was  opened  in  1875. 

In  1892  the  Lehigh  Valley  was  leased  to  the  Reading  for  999 
years.  This  lease  was  broken  the  following  year.  The  depression 
of  1893-7  was  severely  felt  by  the  Lehigh,  with  the  result  of  the 
entire  suspension  of  its  dividends  for  nine  years  from  1894.  In  1897 
a  general  readjustment  of  its  finances  was  arranged  by  J.  P.  Morgan 
&  Co.,  though  the  line  did  not  pass  into  the  hands  of  a  receiver,  and 
its  capital  stock  remained  unchanged. 

The  company  owns  outright,  or  through  ownership  of  the 
entire  capital  stock,  1,210  miles,  and  has  leases  and  trackage  rights 
which  bring  up  the  total  average  mileage  operated  to  1,  429  miles. 

The  road  has  577  miles  of  second  track,  and  40  miles  of  third 
track,  which  means  that  40%  of  the  mileage  is  double  track.  This 
includes  the  entire  line  from  New  York  to  Buffalo. 

Ownership. 

Between  1899  and  1901  J.  P.  Morgan  &  Co.  purchased  the  hold- 
ings of  the  Asa  Packer  estate,  amounting  to  150,000  shares,  equiva- 
lent to  $7,500,000  par  value  of  the  stock.  This  purchase,  with  other 
acquisitions,  gives  practical  control  of  the  road,  and  this  control  was 
in  1901  partitioned  between  the  Lake  Shore,  the  Erie,  the  Reading, 
and  the  Central  of  New  Jersey. 

The  1906  report  of  the  Lake  Shore  shows  holdings  of  $5,700,- 
000  par  value  in  the  Lehigh  Valley  road,  $3,200,000  of  this  having 

(396) 


LEHIGH  VALLEY  397 

been  purchased  at  $30  per  share  in  the  transfer  of  1901.  At  the  last 
reports,  the  Reading  Company  owned  $1,000,000  par  value  of  Lehigh 
Valley  stock,  and  the  Central  of  New  Jersey  $1,600,000.  The 
amount  of  stock  held  by  competing  roads  constitutes  practical  work- 
ing control,  since  the  stock  is  rather  widely  distributed,  like  the  Penn- 
sylvania's, though  in  lesser  degree. 

In  1905  the  road  reported  5,775  shareholders,  a  large  figure  for 
so  small  a  stock  interest. 

The  majority  of  the  directorate  is  made  up  of  representatives 
of  the  New  York  Central.  Erie,  and  Reading  roads.  These  include 
H.  McK.  Twombly  and  George  F.  Baker,  representing  the  New  York 
Central-Lake  Shore;  George  F.  Baer,  president  of  the  Reading  and 
the  Central  of  New  Jersey,  and  Edward  T.  Stotesbury,  a  director  of 
and  representing  the  Reading ;  Charles  Steele,  representing  the  Mor- 
gan interests,  also  a  director  of  the  Erie,  Reading,  Hocking  Valley 
and  other  roads.  The  other  directors  are  Irving  A.  Stearns,  New 
York,  president  of  Coxe  Bros.  &  Co.  Coal  Company,  and  of  the  Dela- 
ware, Susquehanna  &  Schuylkill  Railroad,  up  to  their  absorption  by 
the  Lehigh  in  1905 ;  Joseph  Wharton,  New  York,  president  of  the 
Rossie  Iron  Company ;  Edward  B.  Smith,  New  York,  director  of  the 
American  Gas  Company  and  other  enterprises ;  Robert  C.  Lippincott, 
George  H.  McFadden,  Abraham  Nesbitt  and  Simon  P.  Wolverton. 
E.  B.  Thomas,  former  president  of  the  Erie,  is  the  president. 

Capitalization, 

On  June  30th,  1906,  the  capital  account  stood  as  follows: 

Common  stock $     40,334,800 

Preferred   stock    (10%) 106,300 

Total  stock $    40,441,100 

Net  funded  debt  (including  leased  lines)      124,213,300 

Total  capital    $  164,654,400 

Securities  held   80,481,775 

Approximate  net  capital $84,172,625 

Approximate  net  capital,  per  mile $58,896 

Average  miles  operated 1,429 

Net  earnings  on  net  capitalization 14.7% 

Stock  on  net  capitalization 49% 

Fixed  charges  on  total  net  income 46% 

Factor  of  safety 54% 


'O 


398  LEHIGH  VALLEY 

The  Lehigh  reports  itemize  the  indebtedness  of  leased  and 
underlying  roads,  so  that  it  has  been  possible  to  state  the  capitali- 
zation of  the  road  without  recourse  to  estimates.  It  will  be  seen 
that  the  underlying  securities  added  $45,000,000  to  the  ordinary 
bonded  indebtedness  of  the  road.  From  the  combined  sum,  $2,000,- 
000  of  bonds  held  by  the  company  have  been  deducted.  Against 
this  indebtedness  the  Lehigh  Valley  holds  in  its  treasury  securities 
to  about  $80,000,000. 

Company  of  New  Jersey,  $7,927,000  more,  bringing  the  total  up 
to  over  $80,000,000. 

When  this  is  deducted  from  the  gross  capitalization,  the  net 
capitalization  amounts  to  only  $58,896  per  mile.  This  for  a  double 
track  road  of  the  character  and  resources  of  the  Lehigh  Valley  is 
extraordinary  low.  It  compares  with  estimates  of  $132,789  for  the 
Lackawanna,  about  $145,000  for  the  Pennsylvania,  and  with  $161,- 
742  for  the  Reading. 

That  this  is  no  legerdemain  of  bookkeeping  is  evidenced  by  the 
percentage  which  the  net  earnings  show  on  this  estimate  of  net 
capitalization,  amounting  to  15.5%.  This  compares  with  13.7%  for 
the  Lackawanna,  8.1%  for  the  Pennsylvania,  and  10.8%  for  the 
Reading.  It  exceeds  even  the  high  figure  of  the  Lake  Shore,  which 
was  12.7%. 

Equities  Owned. 

The  total  book  value  of  the  securities  owned  by  the  Lehigh 
amounts  to  $72,554,775,  and  if  we  add  in  the  79,270  shares  of  the 
Coxe  Brothers  &  Co.,  Incorporated,  owned  by  the  subsidiary  Lehigh 
Valley  Railroad  of  New  Jersey,  and  carried  on  the  books  of  that 
company  at  $100  per  $50  share,  the  total  amounts  to  $80,481,775. 

By  far  the  larger  part  of  these  securities,  however,  yield  the 
company  no  interest.  The  chief  items  in  this  regard  are  stock  in 
the  Lehigh  Valley  Company  of  New  York,  at  par  value,  $11,200,000, 
and  of  the  Lehigh  Valley  Company  of  New  Jersey,  $20,433,000, 
together  with  the  stocks  of  the  various  water  lines  included  in  the 
Lehigh  Valley  system,  and  carried  on  the  books  at  a  valuation 
of  $28,834,228.     The  items  for  other  companies  are  small. 

Besides  this  there  are  bonds  of  these  subsidiary  companies  of  a 
value  of  $5,572,926. 

The  stocks  of  allied  coal  companies  are  carried  on  the  books 
at  $19,008,211.  The  larger  part  of  these  is  represented  by  the  pur- 
chase of  the  Coxe  Brothers  &  Co.  Coal  Company  properties,  for 
the  purchase  of  which  $19,000,000  of  collateral  trust  bonds  were 


LEHIGH  VALLEY  399 

issued.  The  report  states  that  "such  of  the  net  current  assets  of 
the  companies  purchased  as  were  not  required  in  the  conduct  of  the 
business  have  been  liquidated,  and  credited  on  the  books  as  a  reserve 
for  the  depreciation  of  those  properties."  On  the  balance  sheet  this 
item  of  reserve  amounts  to  $2,209,360. 

The  Coxe  Brothers  property  was  taken  over  late  in  1905,  and 
presumably  because  a  full  year  of  their  operation  had  not  been  com- 
pleted no  statement  as  to  results  from  this  company  is  given,  beyond 
the  remark  that  "the  net  results  to  your  company  from  the  operation 
of  these  properties  since  the  date  acquired,  notwithstanding  the  sus- 
pension of  mining  for  practically  two  months,  have  been  sufficient 
to  pay  the  interest  on  the  bonds  issued  for  the  purchase  thereof, 
and  provide  a  substantial  amount  which  may  be  applied  to  the 
retirement  of  the  same." 

The  requirements  for  this  latter  item  amount  to  one  million 
dollars  a  year,  but  the  report  does  not  state  as  to  whether  this  full 
amount  had  been  earned.  If  it  can  be,  the  result  of  this  sinking  fund 
will  be  to  give  the  properties  over  to  the  company  free  of  charge 
at  the  end  of  nineteen  years  or  perhaps  less. 

No  returns  from  this  source  are  included  in  the  income  from 
investments,  and  the  actual  income  from  investments  amounted  for 
the  year  to  a  little  over  half  a  million  dollars.  This  was  exclusive  of 
the  $318,489  of  net  income  from  the  operations  of  the  Lehigh  Valley 
Coal  Company. 

The  company  owns  the  entire  amount  of  outstanding  stock  of 
the  Coal  Company,  and  the  net  income  from  this  source  for  several 
years  ranged  between  $600,000  and  $800,000.  The  reduction  in  the 
net  income  for  the  year  of  1906  was  due  in  part  to  the  strike.  Over 
and  above  the  surplus  reported  in  1906  the  coal  company  set  aside 
from  its  net  income,  $250,000  to  the  improvement  fund. 

Coal  Holdings. 

At  the  latest  estimates  the  entire  coal  holdings  of  the  Lehigh 
Valley  Railroad  are  set  down  at  22,720  acres,  containing  an  estimated 
amount  of  unmined  coal  of  400,000.000  tons.  Inasmuch  as  the 
anthracite  coal  fields  are  extremely  limited,  this  is  obviously  of 
enormous  value,  but  it  would  be  quite  impossible  to  give  these  coal 
fields  a  cash  valuation  for  selling  purposes.  If  this  coal  could  be 
mined  at  a  net  profit  of  thirty  cents  a  ton,  such  as  the  reports  of  the 
Reading  or  the  Delaware  &  Hudson  Company  show,  a  cash  valu- 
ation at  10c.  per  ton  would  hardly  be  excessive.  At  this  figure  the 
Lehigh's   holdings    would    represent    a    matter    of   $40,000,000,    or 


400  LEHIGH  VALLEY 

sufficient  to  wipe  out  one-third  of  the  funded  debt  of  the  company. 

The  actual  amount  of  income  to  the  railroad  averaged  through 
several  years  about  $700,000  per  annum.  If  the  surplus  from  the 
Coxe  Brothers'  property  were  sufficient  to  meet  the  sinking  fund 
payments  on  the  collateral  trust  bonds,  this  amount  might  legiti- 
mately be  added  to  the  estimated  net  revenue  of  the  railroad.  The 
reports  of  the  company  for  1907  will  make  clear  the  total  revenue 
that  may  be  expected  from  the  Lehigh's  present  holdings. 

But  it  is  obvious  that  the  direct  income  from  the  railroad  prop- 
ties  represents  only  part  of  the  profit  of  these  holdings  to  the  road. 
The  freight  earnings  from  coal  traffic  alone  amounted  in  1905-6  to 
over  $13,000,000  per  year,  or  more  than  40%  of  the  gross  earnings 
of  the  company,  and  as  already  stated,  85%  of  this  traffic  came  from 
properties  owned  or  controlled  by  the  railroad. 

Increase  of  Capitalization. 

In  six  years  the  increase  of  capitalization  shows  as  follows : 


Year 


I    Funded 
Stock  Debt  Total 


Gross 
Earnings 


1899-00. 
1905-6. . 


$40,441,100    $102,473,000   $142,914,100 
40,441,100      124,213,300      164,654,400 


$23,049,282 
32,789,856 


Increase  over  six  vears :  Nominal  capital,  15%  ;  gross  earnings, 
42%. 

In  the  above  estimates,  the  bonds  of  the  Lehigh  Valley  Coal 
Company  have  been  excluded,  since  through  the  sinking  fund 
operations,  these  bonds  will  ultimately  be  extinguished.  The  item 
of  funded  debt  does  include,  however,  the  company's  bonds  held 
in  its  own  treasury,  in  both  instances.  It  will  be  seen  that  the 
increase  in  gross  earnings  was  largely  in  excess  of  the  increase 
in  the  nominal  capital. 

Character  of  Traffic. 

Of  the  Lehigh's  gross  income,  amounting  to  nearly  thirty-three 
million  dollars,  less  than  four  millions,  or  only  about  12%,  is  derived 
from  passenger  earnings.  The  baance  comes  from  its  freight 
traffic,  in  the  main,  and  in  this  traffic  coal  and  coke  represent  an  even 
half.  Apparently,  the  rates  for  coal  and  other  traffic  are  about  the 
same,  for  the  gross  earnings  from  the  two  sources  are  nearly  equal. 

The  company  does  not  further  itemize  its  merchandise  traffic. 
In  the   following  tabulation   it   is   shown  that  the  growth   in  coal 


LEHIGH  VALLEY 


401 


traffic    has    slightly    exceeded    the    growth    of    merchandise    traffic, 
while  the  passenger  business  has  remained  at  a  standstill. 


Year 


Total  Freight 
Tons 


1906 j      25,568,251 

1905 23,774,287 

1904 

1903 

1902 

1901 

1900 


Coal 
Tons 


Merchandise 
Tons 


21,909,097 
19,920,132 
18,174,886 
18,511,063 
17,430,470 
1899 17,663,010 


12,753,053 
12,518,369 
11,694,151 
9,424,218 
8,923,446 
9,679,564 
8,875,220 
9,195,964 


12,815,198 

11,255,918 

10,214,946 

10,495,914 

9,251,440 

8,831,499 

8,555,250 

8,467,046 


Number 
Passengers 

4,989,989 
4,535,232 
4,199,490 
4,148,477 
4,308,497 
4,756,732 
4,717,849 
4,604,932 


Stability  of  Earnings. 

Through  ten  years  the  earnings  of  the  road  have  very  heavily 
increased,  the  average  earnings  per  mile  having  risen  from  $14,297 
in  1896-7  to  $22,946  in  1905-6,  an  increase  of  60%. 

The  items  were  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896-7 

1,368 
1,394 
1,396 
1,381 
1,400 
1,387 
1,392 
1,392 
1,394 
1,429 

$19,559,167 
19,742,538 
21,570,502 
23,049,282 
26,683,534 
24,272,252 
26,654,503 
29,881,738 
31,275,843 
32,789,856 

$14,297 
14,162 
15,451 
16,690 
19,059, 
17,500 

1897-8 

1898-9. . 

1899-0 

1900-1 

1901-2 

1902-3 

19,149 
21,467 
22,436 

1903-4 

1904-5 

1905-6 

22,946 

This  large  increase  has  considerably  exceeded  the  actual  in- 
crease of  business,  or  tonnage,  and  is  due  in  large  part  to  the  in- 
crease of  rates  which  followed  the  introduction  of  the  community  of 
interest  scheme.  Thus,  in  1899  the  average  freight  rate  per  ton 
mile  was  .52  cents  and  in  1906  .62  cents,  an  increase  of  a  full  mill  per 
mile,  or  about  20%.  On  the  total  traffic  of  the  Lehigh  for  1906,  this 
would  have  represented  a  difference  of  $4,342,000,  or  more  than  half 
the  surplus  shown.  It  will  be  seen,  therefore,  that,  like  other  roads 
which  have  similarly  benefited,  the  Lehigh  Valley  is  very  keenly 
interested  in  the  maintenance  of  the  present  arrangements. 

Maintenance. 

For  years  the  operating  expenses  of  the  Lehigh  Valley  have 
been  very  heavily  charged  for  the  improvement  of  the  road.  This 
was  especially  true  from  1900  to  1903.  It  will  be  seen  from  the  table 
that  in  1902  the  maintenance  charges  amounted  to  $7,000  per  mile. 

26 


A02 


LEHIGH  VALLEY 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

2,464,949 
2,609,541 
2,797,865 
2,948,115 
3,038,762 

$3,340 
2,880 
2,197 
2,345 
2,206 

$3,713 
3,374 
3,408 
3,511 
3,838 

$7,053 
6,254 
5,605 
5,856 
6,044 

Average 

2,771,846 

$2,588 

$3,429 

$6,017 

N.  Y.  C 

Lackawanna.  . 
Erie 

2,070,251 
3,079,629 
2,434,819 

$2,722 
4,754 
1,861 

$3,033 
3,579 
3,216 

$5,755 
8,333 
5,077 

The  reduction  which  the  table  shows  from  the  level  of  1902  is 
only  apparent,  since  in  the  following  year  a  change  was  made  in  the 
method  of  bookkeeping,  whereby  a  separate  charge  was  made  from 
net  income  for  extraordinary  expenditures.  The  amounts  which 
were  set  aside  in  the  four  succeeding  years  are  as  follows : 

1902-3  $1,266,182 

1903-4  1,465,290 

1904-5   1,411,551 

1905-6  1,570,227 


Total   $5,713,250 

The  charges  for  equipment  for  1906  amounted  to  $3,000  per 
locomotive,  $695  per  passenger  car,  and  $61  per  freight  car.  These 
are  very  heavy  charges,  and  probably  amounted  to  an  excess  of  one 
million  dollars  over  what  might  have  been  necessary  had  the  road, 
through  adverse  circumstances,  been  compelled  to  run  on  an  eco- 
nomical basis.  In  estimating  the  earning  power  of  the  road,  this 
sum  might  be  added  to  the  amount  set  aside  for  improvements. 

Surplus  Earnings. 

Owing  to  the  heavy  charges  for  improvements,  the  Lehigh  Val- 
ley showed  a  large  deficit  in  1900  and  again  in  1902.  The  abrupt 
change  from  the  latter  year  to  1903  was  due  in  part  to  the  change 
in  bookkeeping  methods,  for  the  apparent  surplus  shown  includes 
the  $1,266,182  set  aside  for  special  improvements,  as  do  also  the 
amounts  for  subsequent  years.  For  the  rest,  the  change  from  a 
deficit  to  a  large  surplus  is  due  in  part  to  the  reduction  in  the  main- 
tenance charges,  and  in  part  to  the  increased  economies  in  operation 
brought  about  by  the  heavy  improvements  of  the  preceding  years. 
The  following  shows  the  separate  items : 


LEHIGH  VALLEY 


403 


Dividends 

Per  cent. 

Dividends 

Average 

Year 

[Surplus 

on  Preferred 

Earned  on 

Paid  on 

Price 

10% 

Common 

Common 

($50  share) 

1899-0.... 

*$2,077,796 





26 

1900-1.... 

574,612 

,    , 

1.3 

— 

34 

1901-2.... 

*  1,332,776 

,    . 

•    ■    * 

— 

34 

1902-3.... 

3,273,689 

,    . 

8. 

— 

40 

1903-4. . . . 

6,577,287 

11.3 

1 

46 

1904-5.... 

7,439,987 

io 

18.4 

4 

71 

1905-6.... 

7,340,299 

10 

18.3 

4 

75 

*Deficit. 

Even  if  the  $1,570,000  devoted  to  improvements  in  1906  were 
deducted  from  the  surplus  shown  in  the  table,  the  road  would  still 
have  earned  nearly  15%  on  its  capital  stock.  If,  on  the  other  hand, 
the  surplus  were  estimated  on  the  same  basis  as  that  adopted  by 
many  less  prosperous  lines,  the  actual  earnings  could  be  shown  to 
be  far  in  excess  of  this.  There  was,  for  example,  the  item  of 
$250,000  set  aside  from  the  coal  companies'  surplus  for  improve- 
ments, and  if  we  estimate  the  excess  of  maintenance  at  one  mil- 
lion dollars,  and  the  possible  surplus  earnings  from  the  operation 
of  the  Coxe  Brothers  properties  at  another  million  dollars  (and 
include  the  appropriations  for  improvements  on  the  railroad),  this 
would  bring  up  the  surplus  earnings  to  above  nine  and  a  half  mil- 
lion dollars.  This  would  represent  more  than  23%  earned  on  the 
capital  stock.  This  is  a  fine  showing,  and  while  a  full  half  of  it  is 
due  to  improvement  in  freight  rates  over  the  low  levels  of  1899,  it 
reveals  the  exceeding  prosperity  of  the  company. 

Dividend  Record. 

For  a  long  period  anterior  to  the  dull  years  of  1893-7,  high  divi- 
dends were  paid.  They  declined  gradually  from  10%  in  1871-5  to 
4%  in  1893.  Thereafter  no  dividends  were  paid  on  the  common 
stock  for  eleven  years,  and  even  the  dividend  on  the  small  amount  of 
preferred  was  suspended.    The  full  record  is  as  follows : 

% 
1871-5   10 

1876       9 

1877    sy2 

1878-80  4 

1881     sy2 

1882  6y2 

1883-4  8 

1885  6 

1886  4 


404  LEHIGH  VALLEY 

1887       4l/2 

1888-91   5 

1892      5y4 

1893      4 

1894-03   none 

1904       1 

1905       4 

1906       4%  and  1%  extra 

1907       '. 4%  and  2%  extra 

Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906,  the  books  of  the  company 

showed  current  assets  to  the  amount  of $17,700,701 

and  current  liabilities 4,697,944 

leaving  a  working  balance  of $13,002,757 

Of  the  items  of  current  assets,  cash  amounted  to  $11,676,966, 

showing  that  the  company  was  in  ample  funds,  and  had  at  the  time 

a  handsome  working  balance. 

The  amount  to  the  credit  of  profit  and  loss  was  $11,380,815. 
This,   however,    was   the   amount  before   the   payment   of  the 

semi-annual  dividend  ($812,000),  due  a  few  days  after. 

Investment  Value. 

The  Lehigh  Valley  was  one  of  the  roads  which  suffered  severely 
through  the  freight  wars  which  played  so  large  a  part  in  railroad 
operations  in  former  years,  and  in  the  long  depression  of  1893-7  its 
stock  went  down  to  a  low  figure.  As  with  the  Pennsylvania  and  the 
Reading,  its  stock  is  in  $50  shares,  and  in  1897  it  could  have  been 
bought  for  as  low  as  $20  per  share,  and  even  as  late  as  1900  for  $22 
per  share.  From  this  low  point  the  stock  rose  steadily,  correspond- 
ing with  improved  conditions  of  the  road's  finances,  to  $39  per  share 
in  1901  and  to  $45  per  share  at  the  beginning  of  1903.  In  the  decline 
that  followed,  the  stock  went  down  only  to  $35  in  1904,  and  had  risen 
to  $60  in  the  same  year.  In  1905  it  sold  up  to  $90  a  share,  and  in 
1906  to  $86.  This  was  equivalent  on  the  New  York  basis  to  quota- 
tions respectively  of  180  and  172.  In  the  general  decline  of  March, 
1907,  it  fell  to  115. 

These  quotations  are  those  of  the  Philadelphia  exchange,  where 
the  stock  is  actively  dealt  in. 

The  1906  prices  for  a  4%  stock  were  extremely  high  and  obvi- 


LEHIGH  VALLEY  405 

ously  based  not  upon  dividend  payments,  but  upon  the  high  earn- 
ings of  the  road.  The  amount  of  common  stock  is  only  $40,000,000, 
so  that  its  4%  dividend  calls  for  only  $1,600,000.  This  on  a  net  sur- 
plus over  and  above  appropriations  for  improvements  of  $5,770,000, 
leaves  a  wide  margin  for  a  largely  increased  dividend.  It  is  obvious, 
for  example,  that  on  the  basis  of  the  surplus  shown,  in  1906,  and 
that  of  the  two  preceding  years,  its  4%  disbursement  might  readily 
have  been  doubled. 

At  the  average  price  of  150  ($75  per  share),  shown  for  the 
calendar  year  of  1905,  the  stock  yielded  only  2.6%  on  the  investment. 
At  the  lowest  price  of  1906  ($65)  it  yielded  3%.  That  the  dividend 
will  be  increased  either  by  continued  extra  dividends  or  regularly,  is 
practically  assured.  But  if  the  conservative  policy  of  the  road  be 
maintained,  it  is  scarcely  likely  that  this  increase  will  bring  the 
dividend  above  6  or  7%,  though  as  already  indicated,  8%  would 
be  easily  justified.  With  the  immense  coal  holdings  of  the  company, 
its  excellent  management,  and  its  highly  prosperous  condition, 
on  a  7%  basis,  the  stock  might  sell  again  at  the  high  figure 
of  1905;  that  is,  above  $90  per  $50  share.  On  this  basis  a  7% 
dividend  would  yield  nearly  4%  to  the  investor,  with  every  prospect 
of  a  still  further  increase  in  the  dividend,  and  a  corresponding 
increase  in  price,  should  business  conditions  meet  with  no  heavy 
setback. 

It  is  evident  from  the  high  prices  which  the  stock  has  shown 
that  these  anticipations  have  been  pretty  fully  discounted.  At  the 
high  figures  of  1905-6  the  stock  had  small  speculative  attractions. 
Even  at  $65  per  share  the  price  is  clearly  a  speculation  on  the  future 
dividend  policy  of  the  company.  The  surplus  shown  in  the  last  two 
or  three  years  under  view  show,  however,  that  such  a  speculation 
was  as  safe  a  probability  as  a  speculation  well  could  be.  Purchased 
at  anything  like  these  figures  the  stock  would  undoubtedly  yield  a 
handsome  return  in  increased  price,  if  put  away  in  the  investor's 
strong  box. 

A  purchase  at  higher  than  these  figures  would  be  either  a  pure 
gamble,  or  based  upon  that  foreknowledge  of  directors'  intentions 
which  is  so  dubious  an  element  in  stock  manipulation. 


LONG  ISLAND  RAILROAD. 

The  Long  Island  Railroad  comprises  a  network  of  lines  which 
cover  Long  Island,  and  the  road  enjoys  a  monopoly  of  its  territory 
like  that  of  no  other  railroad  in  the  east,  and  comparable  only  to  some 
of  the  lines  in  the  sparsely  settled  territory  of  the  west.  It  has 
practically  no  competitor,  save  the  Brooklyn  Rapid  Transit,  with 
which  it  has  a  fifty-year  traffic  agreement.  Since  1900  it  has  been  a 
part  of  the  Pennsylvania  system,  and  with  the  completion  of  the 
East  River  tunnels,  will  be  a  connecting  link  in  a  close  traffic 
arrangement  between  the  Pennsylvania  and  the  New  Haven  Rail- 
road. 

The  line  is  an  old  one,  having  been  chartered  in  1834,  and 
opened  in  1844,  from  Jamaica  to  Greenport.  Other  lines  have  been 
added  by  consolidation  and  otherwise,  so  that  in  1906  it  operated  392 
miles  of  main  track.  It  also  operates  an  extensive  ferry  service 
between  Manhattan  and  Long  Island. 

Aside  from  the  Pennsylvania  tunnels  on  Thirty-fourth  street, 
the  extension  of  the  Interborough  subway  will  connect  with  the 
road  at  Flatbush  avenue  and  the  Belmont  tunnel  now  under  con- 
struction from  Forty-second  street.  These  tunnels,  when  completed, 
will  undoubtedly  cause  a  heavy  increase  in  the  business  of  the  road. 

Ownership. 

In  May,  1900,  the  Pennsylvania  Company  purchased  $6,797,000 
par  value  of  the  $12,000,000  stock  of  the  road,  and  since  that  time 
the  road  has  been  operated  under  Pennsylvania  auspices.  Aside 
from  Pennsylvania  representatives  the  directorate  of  1906  included 
August  Belmont,  banker ;  Dumont  Clarke,  president  of  the  American 
Exchange  National  Bank ;  W.  G.  Oakman,  former  president  of  the 
Guaranty  Trust  Company;  C.  M.  Pratt,  secretary  of  the  Standard 
Oil  Company,  Franklin  B.  Lord,  and  the  president,  Ralph  Peters. 

In  1898  a  contract  was  entered  into  with  the  Brooklyn  Elevated 
Railway,  now  controlled  by  the  Brooklyn  Rapid  Transit,  for  a  con- 
nection between  the  two  systems.  The  Long  Island  Road  also 
controls  the  Prospect  Park  &  Coney  Island  road,  now  leased  to  a 
subsidiary  company  of  the   Brooklyn   Rapid   Transit,   and   it  also 

(406) 


LONG  ISLAND  407 

controls  the  Montauk  Steamboat  Company,  which  operates  a  line 
of  boats  between  New  York  City  and  North  Shore  Point.  It  owns 
also  a  number  of  trolley  lines  on  the  island. 

Capitalization. 

The  capital  account,  on  January  1st,  1907,  stood  as  follows: 

Capital  stock $12,000,000 

Funded  debt 44,079,790 

Leasehold  estates  3,888,000 

Total    capital $59,967,790 

Rentals  capitalized  at  4% 10,448,775 

Approximate   gross   capitalization $70,416,565 

Securities  held 11,818,301 

Approximate  net  capitalization $58,598,264 

Approximate  net  capital  per  mile $149,317 

Average  miles   operated 392 

Net  earnings  on  net  capital 3.5% 

Stock  on  net  capitalization 20% 

Fixed  charges  on  total  net  income 101% 

As  shown  above,  the  capital  account  does  not  include  the 
amount  of  the  equipment  trust  outstanding,  which  was  not  given 
in  the  report  of  1906.  Through  this  equipment  trust  there  was 
added  during  the  year  2  ferry  boats,  2  car  floats,  25  locomotives,  100 
box  cars  and  34  gondola  cars,  or  roughly  about  $500,000  of  new 
equipment. 

It  will  be  seen  that  the  capitalization  per  mile  is  very  high; 
even  the  bonded  debt  of  the  road  is  above  $120,000  per  mile.  The 
estimated  net  capitalization  of  $149,317  per  mile,  with  earnings  of 
$24,488  per  mile,  stands  against  $103,741  per  mile  for  the  New 
Haven,  and  is  higher  than  that  of  the  New  York  Central.  This 
load  of  debt  is  a  heritage  from  the  old  Austin  Corbin  regime.  The 
net  earnings  of  1906  on  the  estimated  net  capital  represented  3.6%, 
a  rather  low  figure,  but  the  operating  expenses  of  the  road  have 
been  systematically  surcharged  since  the  advent  of  the  Pennsyl- 
vania management,  so  that  the  figure  has  less  significance  than  it 
might  otherwise  possess. 

The  stock  represents  20%  of  the  net  capitalization,  and  in 
1906  fixed  charges  consumed  slightly  more  than  the  total  net  income. 


408 


LONG  ISLAND 


In  other  words,  the  operating  expenses  were  adjusted  so  as  to  just 
about  pay  the  fixed  charges. 

Increase  of  Capitalization. 

Since  the  advent  of  the  Pennsylvania  management  the  funded 
debt  of  the  road  has  been  increased  by  $21,809,000,  equivalent  to 
$55,635  per  mile  of  road  operated.  In  the  same  period,  however, 
the  gross  earnings  have  increased  $12,893  per  mile.  The  increase 
in  the  nominal  capital  was  equivalent  to  58%,  while  the  gross  earn- 
ings increased  113%.    The  items  compare  as  follows: 


Year 

Common 
Stock 

Funded 
Debt 

Total 

Gross 
Earnings 

1899-0 

1906 

$12,000,000 
12,000,000 

$26,158,702 
47,967,790 

$38,158,702 
59,967,790 

$4,557,259 
9,595,596 

Character  of  Traffic. 

The  Long  Island  road  is  exceptional  from  the  fact  that  its 
earnings  from  passenger  traffic  were  in  1906  more  than  double  its 
earnings  from  freight  traffic,  and  passenger  earnings  contributed 
about  60%  to  the  gross  earnings  of  the  road.  Likewise  the  express 
traffic  was  exceptionally  heavy,  contributing  in  1906  nearly  12%  of 
the  gross. 

Stability  of  Earnings. 

In  the  ten  years  preceding  the  advent  of  the  Pennsylvania 
management,  the  earnings  of  the  road  were  practically  stationary, 
fluctuating  around  $4,000,000  annually.  They  have  risen  steadily 
in  seven  and  a  half  years  from  $11,595  per  mile  in  1900  to  $24,488  in 
1906.  That  is  to  say,  more  than  double.  In  the  table  below  the  gross 
for  1905  and  for  1906  includes  the  gross  earnings  of  the  river  and 
harbor  service,  not  previously  included  in  gross  income  and  not  so 
shown  in  the  original  report  of  1905. 


Year 


Miles  Operated 


Gross  Earnings 


1896... 
1897... 
1898... 
1899... 
1900... 
1900-1. 
1901-2. 
1902-3. 
1904... 
1905... 
1906... 


383 
398 
403 
403 
393 
380 
395 
391 
391 
391 
392 


$3,962,799 
3,954,866 
4,333,194 
4,622,475 
4,557,259 
4,862  347 
5,883,607 
6,440,992 
7,083,807 
8,501,466* 
9,595,596* 


Per  Mile 

$10,347 
9,936 
10,752 
11,470 
11,595 
12,795 
14,858 
16,473 
18,117 
21,687* 
24,488* 


*  Includes  River  &  Harbor  Co.  earnings. 


LONG  ISLAND 


409 


The  increase  of  freight  mileage  in  1906  was  small,  amounting 
to  only  5%,  while  the  increase  in  passenger  mileage  was  22%. 

Maintenance. 

With  the  Pennsylvania's  purchase  of  the  control  of  the  road,  it 
immediately  began  a  broad  system  of  improvements  which  have 
included  heavy  charges  to  maintenance  account.  As  will  be  seen 
from  the  table  below,  maintenance  of  way  per  mile  of  operated  road 
has  increased  from  $1,624  to  $2,694,  or  $1,070  per  mile,  equivalent 
to  above  60%. 

Maintenance  of  equipment  has  increased  from  $1,229  to  $2,995, 
or  $1,766,  equivalent  to  144%.  In  the  meantime  freight  traffic 
density  increased  about  67%  and  the  passenger  traffic  density  62%. 
These  items  compare  as  follows : 


Traffic 

Density 

Maintenance  per  Mile 

Total 

Freight 

Passenger 

Way 

Equipment 

1900-1 

111,287 

523,141 

$1,624 

$1,229 

$2,853 

1901-2 

128,434 

607,787 

1,795 

1,351 

3,146 

1902-3 

142,101 

644,851 

1,882 

1,515 

3,397 

1903-4 

145,708 

675,771 

2,197 

3,408 

5,605 

1904 

149,857 

698,986 

2,013 

1,819 

3,832 

1905 

176,820 

700,389 

2,113 

2,594 

1906 

185,774 

854,494 

2,694 

2,995 

5,689 

Average . . . 

148,568 

672,202 

1 

$2,045 

$2,130 

$4,175 

These  figures  indicate  a  considerable  surcharge,  but  the  amount 
of  this  surcharge  is  difficult  to  estimate,  owing  to  the  peculiar  char- 
acter of  the  traffic  and  equipment  of  the  road.  The  locomotive 
repairs  amounted  to  8c  per  engine  mile,  which  compares  with  9.4c 
per  engine  mile  for  the  Pennsylvania,  as  a  whole.  But  the  locomo- 
tive equipment  of  the  Long  Island  road  is,  of  course,  much  lighter 
than  that  of  the  Pennsylvania. 

The  operating  ratio  for  1906  was  78% — practically  the  same 
figure  as  the  preceding  year. 

If  the  surcharge  amounted  to  as  much  as  5%,  this  would  be 
equivalent  to  $480,000,  which  would  represent  nearly  $1,200  per  mile 
of  excess  maintenance,  and  this  would  be  equivalent  to  nearly  4% 
on  the  outstanding  capital  stock. 

The  road  is,  however,  in  a  transition  period  and  obviously  pre- 
paring for  a  heavy  increase  of  traffic  as  soon  as  die  tunnels  under 
the  East  River  are  completed  and  the  Long  Island  has  through  rail 
connections  with  the  Pennsylvania. 


410  LONG  ISLAND 

Surplus  Earnings. 

Under  these  heavy  charges   for  maintenance  the   surplus  ha? 
shown  as  follows  since  1901 : 


Year 

Surplus 

Per  cent. 

Earned  on 

Common  % 

Dividends 

Paid  on 

Common 

Average 
Price 

1900-1 

1901-2 

1902-3 

1903-4 

1905 

$206,164 

544,255 

305,588 

(Def.)   275,205 

22,529 

(Def.)     28,358 

1.7 
4.5 
2.5 

None 

71 
80 
76 
54 
61 

1906 

The  Long  Island  has  paid  no  dividends  since  1897.    From  1883 
to  1890  it  paid  4%  yearly,  in  1891  4y2%,  in  1892-3  5%,  in  1894 
4y2%  and  in  1895-6  4%.  " 

The  Balance  Sheet. 

As  of  December  31st,  1906,  the  balance  sheet  showed: 


Current  Assets  (excluding  materials  on  hand). 
Current  Liabilities 


$4,342,087 
2,530,904 


Leaving  a  working  balance  of $1,811,183 

The  item  of  current  assets  included  about  $2,670,000  of  advances 
to  other  companies,  which  were  scarcely  a  quick  asset. 

The  item  of  cash  amounted  to  $365,369  and  the  profit  and  loss 
account  showed  a  debit  of  $1,747,236,  an  increase  for  the  year  of 
$208,037. 

Investment  Value. 

For  the  ten  years  since  1897  an  investment  in  the  Long  Island 
stock  would  have  shown  no  returns  whatever,  and  it  is  not  improb- 
able that  this  situation  will  continue  for  two  or  three  years  longer. 
Should  the  tunnels  be  completed  at  the  close  of  1908,  the  year  of  1909 
should  show  a  heavy  increase  of  earnings,  and  under  reasonable 
conditions  might  yield  a  fair  return  on  the  stock. 

The  stock  is  attractive,  therefore,  only  for  a  long  pull.  It  has 
varied  between  a  low  point  of  48  in  1904  to  81  in  1906.  In  the 
stock  boom  of  1901  it  was  run  up  to  90,  and  to  91  in  1902.  If  it 
should  pay  4%  in  1909,  it  could  reasonably  be  expected  to  go  to  par. 
The  return  which  an  investor  would  receive,  therefore,  could  be 
measured  by  the  difference  betwen  this  price  and  what  he  paid  for  it, 
divided  by  three  or  four.  Should  the  earnings  of  the  road  meet 
expectations,  the  dividend  in  a  few  years  might  be  even  higher, 
but  this  is  pure  speculation.     On  a  speculative  investment  there  are 


LONG  ISLAND  411 

few  who  would  be  satisfied  with  a  return  of  less  than  15%  per 
annum,  and  supposing,  therefore,  that  the  stock  should  reach  par 
within  three  years,  it  might  be  considered  as  worth  some- 
where around  50.  Bought  at  this  figure  or  lower,  it  should  return 
within  three  or  four  years  a  satisfactory  interest  to  its  purchasers. 
It  sold  at  $52  per  share  in  March  of  1907. 


LOUISVILLE  AND  NASHVILLE  RAILROAD. 

The  Louisville  &  Nashville,  although  now  owned  and  controlled 
by  the  Atlantic  Coast  Line,  is  operated  separately,  and  its  total 
mileage  owned  and  controlled  is  much  larger  than  the  Atlantic  Coasf 
Line.  It  is  one  of  the  oldest  and  has  long  been  one  of  the  leading 
systems  of  the  southern  states.  In  1906  it  directly  operated  4,205 
miies  of  road,  and  controlled  through  stock  ownership  or  jointly 
with  other  roads,  2,366  miles  more,  which,  with  the  lines  operated 
by  its  subsidiary  companies,  brought  the  total  up  to  6,842  miles.  Its 
lines  form  a  perfect  network  southward  from  Cincinnati  and  Louis- 
ville to  Pensacola  and  New  Orleans,  covering  the  rich  iron  district? 
about  Birmingham,  and  with  branches  extending  to  Memphis  and  to 
St.  Louis.  Jointly  with  the  Southern  Railway  it  owns  a  large  parr 
of  the  stock  of  the  "Monon"  (Cincinnati,  Indianapolis  &  Louisville), 
and  with  the  Atlantic  Coast  Line  it  jointly  owns  the  Georgia  Rail- 
road, and  its  subsidiary,  the  Atlantic  &  Western.  The  road  has  long 
been  characterized  by  admirable  management,  and  in  spite  of  con- 
siderable difficulties  managed  to  keep  its  feet  through  the  depression 
of  1873-7,  and  again  of  1893-7.  Since  the  latter  period,  it  has  shown 
a  high  degree  of  prosperity. 

History. 

The  Louisville  &  Nashville  dates  from  1850,  when  a  line  from 
Louisville,  the  "Tobacco  capital'"  of  Kentucky,  to  Nashville,  was 
projected.  The  line  was  opened  in  1859,  and  despite  the  troubles 
of  the  war,  the  company  was  able  to  declare  its  first  cash  dividend 
in  1863,  and  continued  to  pay  excellent  returns  until  1873.  About 
1870  it  began  a  policy  of  extension  which  in  the  ensuing  crisis 
brought  anxious  times  to  the  management.  It  recovered,  however 
and  by  1880  it  became  so  prosperous  that  it  declared  a  script  dividend 
of  100%,  and  even  on  its  doubled  capital  in  1881,  was  able  to  pay 
6%  dividends.  The  failure  of  its  president,  Mr.  Baldwin,  in  1884, 
shook  confidence  in  the  road,  but  it  again  pulled  through,  and  by 
1890  it  was  directly  operating  2,858  miles  of  road,  with  an  interest 
in  about  2,000  miles  more.     In   1902  a  controlling  interest  in  the 

(412) 


LOUISVILLE  &  NASHVILLE  413 

Atlanta,  Knoxville  &  Northern  was  purchased  and  in  due  course  this 
was  absorbed  into  the  main  system.  In  the  same  year,  in  company 
with  the  Southern  Railway,  it  purchased  a  large  interest  in  the 
"Monon,"  which  gave  to  these  roads  a  joint  outlet  to  Chicago.  The 
absorption  of  a  number  of  small  lines  has  brought  up  the  road  to  its 
present  mileage.  Tbe  most  important  of  its  subsidiary  companies  is 
the  Nashville,  Chattanooga  &  St.  Louis,  operated  separately,  which 
controls  about  1,270  miles  of  road.  The  Louisville  &  Nashville  is 
also  the  joint  lessee  with  the  Atlantic  Coast  Line  of  the  Georgia 
Railroad  and  its  dependencies,  operating  571  miles. 

Ownership. 

The  transfer  of  the  control  of  the  system  in  1902  was  one  of 
the  most  dramatic  incidents  in  recent  railway  finance.  The  road  up 
to  that  time  had  been  owned  largely  in  England,  and  in  particular 
the  Rothschilds  were  reputed  to  be  heavily  interested.  The  story 
as  told  by  Moody's  Magazine,  a  journal  of  repute,  is  that  the 
directors  of  the  road  had  decided  upon  a  new  issue  of  $5,000,000 
stock  to  be  offered  at  par.  As  no  rights  accrued  from  the  subscrip- 
tions, the  effect  of  the  new  issue  would  be,  other  things  being  equal, 
to  depress  somewhat  the  market  price  of  the  stock,  and  in  antici- 
pation of  this  probability,  a  considerable  quantity  of  stock  was  sold 
"short."  A  party  headed  by  John  W.  Gates,  of  Chicago,  apparently 
gained  information  as  to  this  intention  and  proceeded  to  take  all  the 
stock  that  was  offered.  Amid  considerable  excitement,  the  stock 
rose  rapidly  from  a  low  point  of  $105  to  $146  in  the  month  following- 
Possibly  somewhat  to  their  suprise,  the  Gates  party  found  themselves 
in  possession  of  a  majority  of  the  stock.  They  were  simply  specu- 
lators, and  had  no  intention  of  acquiring  the  road,  and  finding  the 
burden  somewhat  heavy,  the  controlling  interest  was  offered  to  and 
taken  by  Messrs.  J.  P.  Morgan  &  Co.,  but  shortly  afterwards  trans- 
ferred to  the  Atlantic  Coast  Line.  The  latter  road  paid  therefor 
$10,000,000  in  cash,  $35,000,000  in  4%  50-year  collateral  trust  bonds, 
and  $5,000,000  common  stock.  As,  however,  the  Atlantic  Coast  Line 
was  shortly  afterwards  selling  at  $125  per  share,  the  approximate 
purchase  price  paid  for  the  Louisville  &  Nashville  was  $51,625,000, 
which  for  the  $30,600,000  par  value  shares  acquired  was  an  average 
of  $169  per  share.  This  was  a  difference  of  about  $60  per  share  over 
the  average  price  at  which  the  stock  had  been  selling  through  the 
preceding  year  or  more,  or  the  equivalent  of  about  $18,000,000,  which 
sum  apparently  was  divided  between  the  sellers  of  the  stock,  the 
Gates'  intermediaries,  and  the  final  sellers  of  the  stock.     The  pur- 


414  LOUISVILLE  &  NASHVILLE 

chase,  however,  was  highly  profitable  for  the  Atlantic  Coast  Line,  for 
the  earnings  of  the  road  are  enormous  and  more  than  sufficient  to 
justify  the  price  paid. 

A  further  particular  of  interest  is  that  the  Atlantic  Coast  Line  is 
in  turn  controlled  by  a  small  holding  company  known  as  the  Atlantic 
Coast  Line  Company  of  Connecticut,  so  that  the  control  of  the 
combined  Atlantic  Coast  and  Louisville  systems,  operating  and  con- 
trolling over  11,000  miles  of  railway,  is  vested  in  an  organization 
with  a  capital  of  only  $10,500,000.     (See  Atlantic  Coast  Line). 

The  1906  directorate  was  made  up  of  Henry  Walters,  chairman 
of  the  board,  likewise  chairman  of  the  board  of  the  Atlantic  Coast 
Line,  a  director  of  the  Colorado  &  Southern,  Northern  Central  Rail- 
way and  other  enterprises ;  Michael  Jenkins,  of  Baltimore,  president 
of  the  Atlantic  Coast  Line  Company  of  Connecticut;  Alexander 
Hamilton,  first  vice-president  of  the  Atlantic  Coast  Line  Railroad; 
Warren  Delano,  Jr.,  of  New  York,  largely  interested  in  coal  enter- 
prises, also  a  director  in  the  Atlantic  Coast ;  August  Belmont,  of  the 
banking  firm,  president  of  the  Interborough-Metropolitan,  director 
of  the  Long  Island  Railroad,  etc. ;  Walter  G.  Oakman,  former  presi- 
dent of  the  Guaranty  Trust  Company  of  New  York,  now  a  director 
in  the  Interborough,  in  the  Long  Island,  the  Alabama  Great  South- 
ern, etc. ;  John  I.  Waterbury,  president  of  the  Manhattan  Trust 
Company  of  New  York,  also  a  director  in  the  International  Mer- 
cantile Marine,  etc. ;  D.  P.  Kingsley,  president  of  the  New  York 
Life  Company;  Edward  W.  Sheldon,  of  New  York,  formerly  a  di- 
rector and  general  counsel  of  the  Wisconsin  Central ;  G.  M.  Lane, 
Boston;  W.  G.  Raoul,  Atlanta;  Attilla  Cox,  Louisville,  and  Milton 
H.  Smith,  Louisville,  president  of  the  road. 

The  affiliations  of  the  Louisville  &  Nashville  are  naturally  those 
of  the  Atlantic  Coast  Line,  and  through  joint  ownership  of  the 
Monon  it  is  also  associated  with  the  Southern  Railway,  its  chief 
competitor. 

Management. 

As  already  noted  the  chairman  of  the  board,  Mr.  Walters,  is 
also  chairman  of  the  Atlantic  Coast  board.  He  is  the  son  of  William 
T.  Walters,  who  is  largely  responsible  for  the  upbuilding  of  the 
Atlantic  Coast  Line  to  its  present  strong  financial  position. 

Doubtless  in  consequence  of  the  purchase  of  the  controlling 
interest  by  the  Atlantic  Coast,  the  number  of  shareholders  is  small, 
the  road  reporting  only  1,672  in  1904,  as  against  9,572  for  the 
Southern  in  the  same  year. 


LOUISVILLE  &  NASHVILLE  415 

Capitalization. 

Deducting  from  its  funded  debt  its  own  bond  issues  held  in  its 
treasury,  or  by  trusts,  to  the  par  value  of  $45,639,000,  the  capital 
account  of  the  road  on  June  30th,  1906,  stood  as  follows : 

Common   stock    $     60,000,000 

Funded  debt    129,153,500 

Subsidiary  companies  (net) 4,938,150 

Total  capital    $194,091,650 

Securities  held 30,160,043 

Approximate  net  capital $163,931,607 

Approximate  net  capital,  per  mile $39,684 

Average  miles   operated 4,131 

Net  earnings  on  net  capitalization 8.9% 

Stock  on  net  capitalization 36% 

Fixed  charges  on  total  net  income 54% 

Factor  of  safety  (see  below) 46% 

In  the  above  estimate  of  the  net  capitalization,  no  consideration 
has  been  taken  of  rentals  paid  or  received.  The  amounts  received 
were  greater  than  the  amounts  paid,  and  this  item  would  therefore 
tend  slightly  to  reduce  rather  than  augment  the  net  capitalization 
of  the  road. 

It  will  be  seen  that  with  gross  earnings  of  $10,400  per  mile,  the 
average  capitalization  of  the  road  is  low ;  its  figure  of  $39,684  com- 
paring with  $49,223  per  mile  for  the  Southern  Railway,  with  gross 
earnings  of  $7,200  per  mile,  and  $47,453  for  the  Seaboard,  with  gross 
earnings  of  $5,790  per  mile. 

In  1894  Louisville  &  Nashville  closed  its  construction  account, 
and  since  that  time  has  charged  large  sums  annually  for  improve- 
ments to  its  operating  expenses.  The  amounts  so  charged  are 
itemized  in  the  reports,  and  if  the  $2,586,000  so  devoted  in  1906  be 
added  to  the  net  earnings  of  that  year,  as  is  the  general  custom  with 
other  roads,  the  net  earnings  show  8.9%  on  the  net  capitalization. 
Thisfigure  compares  with  similar  estimates  of  4.2%  for  the  Southern 
Railway,  3.7%  for  the  Seaboard  and  7.9%  for  the  Illinois  Central. 

As  to  the  style  of  capitalization,  it  will  be  seen  that  the  larger 
part  is  represented  by  the  funded  debt,  the  stock  amounting  to  onlv 
36%  of  the  net  capitalization. 


416  LOUISVILLE  &  NASHVILLE 

In  keeping  with  the  high  earnings  of  the  road,  fixed  charges 
consumed  in  1906  only  54%  of  the  total  net  income  shown  in  the 
report.  This  is  on  the  nominal  net  income,  but  if  as  is  customary 
on  other  roads,  the  sums  devoted  from  earnings  to  improvements 
were  included  in  the  income,  fixed  charges  for  1906  represented  only 
45%  of  this  sum,  leaving  a  Factor  of  Safety  on  the  underlying 
securities  of  a  full  55%. 

Were  the  considerable  equities  accruing  to  the  Louisville  & 
Nashville  from  its  stock  ownership  of  other  roads  considered,  in 
the  estimate  of  total  net  income,  this  factor  of  safety  would  rise 
to  a  still  higher  figure. 

Equities  Owned. 

The  largest  single  interest  which  the  Louisville  &  Nashville 
has  in  outside  companies  is  its  ownership  of  $7,176,600  par  value 
of  the  $10,000,000  of  stock  of  the  Nashville,  Chattanooga  &  St. 
Louis.  This  road  is  operated  separately,  but  under  practically  the 
same  management,  and  is  to  all  intents  a  part  of  the  system.  It 
paid  in  1905,  5%,  but  after  heavy  improvement  charges  showed  a 
surplus  of  approximately  9^%  on  its  capital  stock.  Additions  to 
property  and  equipment  from  earnings  amounted  to  $1,289,421, 
and  this  was  after  probably  excessive  maintenance  charges,  so  that 
the  surplus  earned  by  the  road  for  the  year  was  not  less  than 
$2,200,000,  and  actually  considerably  in  excess  of  this.  The  Louis- 
ville &  Nashville's  interest  in  the  undivided  surplus  in  this  company 
for  the  year  was  not  less  than  $1,200,000. 

As  its  one-half  interest  in  the  Monon,  the  Louisville  &  Nash- 
ville owns  $4,893,450  par  value  out  of  a  total  of  $10,500,000  of  the 
common  stock,  and  $1,936,700  par  value  of  the  preferred,  or  a  total 
of  $6,830,600.  Jointly  the  two  roads  own  92'^%  of  the  common 
and  77%  of  the  preferred,  paying  for  the  same  a  total  of  $11,827,000. 
On  its  half  of  this  interest,  the  Louisville  &  Nashville  received  in 
1906,  $224,571,  or  just  about  sufficient  to  pay  the  4%  interest  on  the 
purchase  bonds.  On  the  common  stock  in  1906,  the  Monon  earned 
above  9%,  which  left  an  equity  amounting  to  about  6%,  or  in  the 
neighborhood  of  $300,000. 

The  Louisville  &  Nashville  likewise  has  a  half  interest  in  the 
profits  of  the  Georgia  Railroad  and  dependencies,  leased  jointly  with 
the  Atlantic  Coast  Line,  but  the  amount  earned  was  not  considerate. 

All  told  the  company  received  in  1906  from  its  investments, 
$814,318,  which  was  equivalent  to  2.7%  on  the  book  valuation  of  the 
securities  it  owns.    The  equities  in  the  undistributed  surplus  of  these 


LOUISVILLE  &  NASHVILLE 


417 


outside  companies  would  have  been  much  more  than  this  amount, 
so  that  the  book  valuation  is  probably  under  rather  than  over  their 
actual  worth. 

Increase  of  Capitalization. 

The  increase  of  capitalization  as  compared  with  the  gross  earn- 
ings for  a  period  of  six  years  has  been  as  follows : 


Year 

Capital  Stock      Funded  Debt 

Total 

Gross    Earnings 

1900, 
1906 

$55,000,000 
60,000,000 

$90,026,660 
129,153,500 

$145,021,160 
189,153,500 

$27,742,379 
43,008,996 

Net  income  over  six  years :  Nominal  capital,  30%  ;  gross  earn- 
ings, 55%. 

Of  the  $45,000,000  of  new  capital  added  in  the  six  years,  about 
twenty  million  dollars  has  gone  into  the  purchase  of  securities  in 
outside  companies,  so  that  the  actual  increase  of  the  road  has  been 
only  a  little  over  15%.  Again  in  1900,  the  company  included  in  its 
gross  earnings  its  own  company  freight,  which  was  not  done  in  the 
following  years,  so  that  the  actual  increase  in  gross  earnings  was 
slightly  larger  than  that  shows,  or  around  60%.  This  heavy 
increase  in  earnings  on  a  comparatively  slight  capital  increase  is 
due  to  the  policy  of  the  road  in  turning  back  a  large  proportion  of  its 
surplus  earnings  into  improvements. 

Character  of  Traffic. 


The  Louisville  &  Nashville  is  one  of  the  roads  which  do  not 
itemize  their  traffic  tonnage.  Passenger  traffic  contributed  less  than 
20%  of  the  gross  earnings  of  the  road.  Cotton  is  obviously  a  large 
factor,  and  another  is  the  mineral  industries  of  Northern  Alabama. 
Taken  as  a  whole  the  company's  business  is  widely  distributed,  and 
its  earnings  are  not  dependent  upon  any  particular  product. 

Stability  of  Earnings. 

Since  1896,  the  gross  and  mileage  earnings  have  shown  as 
follows : 

27 


418 


LOUISVILLE  &  NASHVILLE 


Year 

Miles  Operated 

Gross  Earnings 

Earnings 
Per  Mile 

1895-6 

1896-7 

1897-8 

1898-9 

1899-0 

1900-1 

1901-2.. 

2,965 
2,981 
2,98S 
2,988 
3,007 
3,169 
3,327 
3,439 
3,618 
3,826 
4,  131 

$20,390,711 

20  ,372  ,308 

21  ,996  ,653 
23  ,759  ,485 

27  ,742  ,379 

28  ,022  ,206 
30,712,257 
35,449,378 
36,943,793 
38,517,071 
43  ,008,996 

$6  ,877 
6,834 
7  ,361 
7,951 
9,224 
8,841 
9  232 

1902-3 

1903-4 

1904-5 

1905-6 

10.30S 
10,211 
10,066 
10,411 

In  the  years  against  which  an  asterisk  stands,  the  company 
included  its  company  freight  in  the  total  of  gross,  these  amounting 
in  1901,  for  example,  to  about  $1,200,000.  The  actual  increase  for 
the  eleven  years  shown  was  somewhat  greater  than  the  table  repre- 
sents. Even  as  it  was,  it  will  be  seen  that  the  gross  earnings  more 
than  doubled,  and  the  mileage  earnings  actually  increased  more 
than  50%. 

It  will  be  seen  that  with  the  exception  of  the  two  years  from 
1900  to  1901,  the  increase  in  the  mileage  earnings  has  been  steady, 
and  without  interruption,  though  these  earnings  were  practically 
stationary  for  the  four  latter  years. 

Maintenance. 

It  has  already  been  noted  that  large  sums  have  been  annually 
charged  to  operating  expenses  for  improvements,  the  amount  in 
1906  being  $2,586,000.  It  follows  naturally  from  this  that  the  main- 
tenance charges  have  been  heavy.  For  six  years  they  compare  as 
follows : 


Year 


1900-1 . 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1905-6. 


Traffic  Density 


Maintenance  per  Mile 


Way 


838,114 
923,505 
992,853 
956,427 
916,362 
950,304 


$1,374 
1,363 
1,554 
1,576 
1,490 
1,582 


Equipment 


Total 


$1,260 
1,324 
1,547 
1,548 
1,659 
1,886 


$2,634 
2,687 
3,101 
3,124 
3,149 
3,468 


Average.  .  .  . 

929,594 

$1,490 

$1,537 

$3,027 

111.  Cent 

Southern 

Seaboard  

Atl.  Coast.  .  .  . 

1,180,351 
435,987 
311,366 
257,769 

1,386 
860 
620 
709 

1,486 
964 
611 
556 

2,872 
1,824 
1,231 
1,265 

The  total  maintenance  in  1906  amounted  to  $14,328,000.     The 
$2,586,000  charged  to  expenses  for  improvements  amounted  to  18% 


LOUISVILLE  &  NASHVILLE  419 

of  the  total.  There  were  very  nearly  corresponding  amounts  in  the 
previous  years,  so  that  for  the  purpose  of  a  comparison  with  other 
roads,  the  Louisville  &  Nashville  might  be  legitimately  scaled  by 
one-sixth.  This  would  have  reduced  the  average  total  maintenance 
for  the  six  years  to  about  $2,500  per  mile. 

On  this  basis  it  will  be  seen  that  the  Louisville  &  Nashville 
standard  of  charges  was  rather  below  the  Illinois  Central,  traffic 
density  compared.  The  traffic  density  of  the  Southern  was  less  than 
one-half,  and  its  maintenance  charges  only  about  one-third  less.  The 
traffic  density  of  the  Seaboard  was  only  one-third  and  its  mainten- 
ance about  half.  While  therefore  the  Louisville  &  Nashville's  main- 
tenance charges  have  been  very  liberal,  the  amounts  buried  in  main- 
tenance have  hardly  been  so  great  as  some  extravagant  estimates 
have  represented.  For  the  purpose  of  getting  at  the  actual  surplus 
earnings  of  the  road  it  would  probably  be  safe  to  do  what  has  been 
done  here,  that  is,  simply  to  take  the  amounts  charged  to 
improvements  annually  as  shown  in  the  company's  reports,  and  add 
these  to  the  nominal  surplus  shown. 

These  amounts  since  the  closure  of  the  construction  account  in 
1894  compare  as  follows: 

1894-5  $  279,584 

1895-6  617,342 

1896-7  ■ 546,571 

1897-8  659,950 

1898-9  517,785 

1899-0  1,021,843 

i900-l  1,474,503 

1901-2  1,487,277 

1902-3  2,000,204 

1903-4  1,746,184 

1904-5 2,562,314 

1905-6  2,586,630 

Total  — $15,500,187 

These  amounts  may  be  used  for  the  purpose  of  comparison  with 
similar  charges  on  other  roads  usually  deducted  from  the  nominal 
surplus  earnings.  For  example,  since  1900  the  amount  so  set  aside 
from  earnings  on  the  Southern  Railway  was  $2,830,182. 


420 


LOUISVILLE  &  NASHVILLE 
Surplus  Earnings. 


The  amounts  shown  in  the  table  below  are  the  nominal  surplus 
earnings  shown  in  the  reports  of  the  company,  plus  the  amounts 
charged  to  operating  expenses  annually  for  improvements  as  shown 
in  the  table  above. 


Year 

Surplus 

Per  cent. 
Earned  on 
Common 

Dividends 
Paid  on            Average 
Common             Price 

1900-1 $5,755,615 

1901-2 6,212,585 

1902-3 8,211,252 

1903-4 8,434,355 

1904-5 9,389,354 

1905-6 8,935,004 

10.4 
10.3 
13.6 
14.0 
15.6 
14.9 

5 
5 
5 
5 
5 
6 

87 
111 
109 
117 
146 
147 

Dividend  Record. 

The  complete  dividend  record  for  36  years  stands  as  follows 
Year.  Cash  %     Stock. 

1871-3    7 

1874-6    — 

1877     \y2 

1878  3 

1879  4 

1880  8         100 

1881  6 

1882  3 

1888-9  —  5 

1890      1.1        4.9 

1891       5 

1892-3    4 

1894-8    — 

1899  3y2 

1900  4 

1901-4  5 

1905-6  6 

The  Balance   Sheet. 

At  the  close  of  the  fiscal  year  of  1906  the  company  showed : 

Current  assets $12,712,706 

Current   liabilities 9,546,430 

Leaving  a  working  balance  of $  3,166,276 


LOUISVILLE  &  NASHVILLE  421 

This  was  a  very  great  improvement  for  the  company's  working 
capital  over  the  previous  year,  when,  on  account  of  various  ex- 
penditures, the  current  liabilities  were  nearly  $5,000,000  in  excess 
of  the  current  assets. 

The  items  of  cash  amounted  to  $8,245,502,  and  the  balance  to 
the  credit  of  profit  and  loss  was  $18,130,045. 

Investment  Value. 

A  road  which  in  six  years  has  been  able  to  add  50%  to  it? 
gross  earnings  on  an  actual  increase  of  railway  capital  proper  of 
not  more  than  15%,  has  obviously  kept  its  property  in  the  pink  of 
condition.  After  charging  its  earnings  heavily  for  improvements, 
it  is  probable  that  the  actual  earnings  which  have  gone  back  into 
the  road  have  very  considerably  exceeded  the  amounts  shown  in  the 
reports,  and  given  in  the  tables  above,  but  this  has  been  the  policy 
of  all  the  prosperous  roads  of  the  United  States,  and  what  one  road 
does  another  more  or  less  must  do.  For  this  reason  it  would  prob- 
ably be  safe,  as  already  noted,  to  consider  the  actual  earnings  of  the 
Louisville  &  Nashville  on  its  stock,  exclusive  of  equities,  at  about 
the  percentage  shown  in  the  table  of  surplus  above. 

On  the  other  hand,  the  road  might  at  a  pinch  of  necessity  have 
added  at  least  one  million  dollars  to  its  other  income,  by  increasing 
the  dividends  of  the  controlled  roads,  and  were  the  surplus  of  the 
roads  in  which  it  has  a  joint  interest  with  the  Atlantic  Coast  Line 
and  Southern  Railway  likewise  to  be  divided,  this  might  add  from 
$400,000  to  $500,000  more.  Excluding  this  latter  consideration,  it 
is  safe  to  say  that  the  actual  earnings  of  the  Louisville  &  Nashville 
in  1906  available  for  dividends  on  its  stock  was  not  less  than  $10,- 
000,000,  or  equivalent  to  16.2%  on  the  stock  outstanding.  Even  on 
a  scale  of  a  dollar  for  dividends,  and  a  dollar  for  improvements 
(which  few  roads,  the  Pennsylvania  least  of  all,  adhere  to),  the 
Louisville  &  Nashville  in  1906  could  have  comfortably  paid  8% 
dividends  and  turned  back  an  equal  amount;  that  is  to  say,  nearly 
$5,000,000  into  the  betterment  of  the  road. 

If,  therefore,  the  road  were  to  be  taken  over  under  lease  by 
the  controlling  Atlantic  Coast  Line,  it  is  safe  to  say  that  the  minority 
of  the  stockholders,  who  apparently  hold  about  49%  of  the  stock, 
would  probably  not  be  willing  to  accept  an  offer  of  less  than  an  8% 
guarantee.  The  road  is  at  present  paying  6%  dividends,  and  on  this 
basis  the  stock  would  readily  be  entitled  to  sell  around  $150  per 
share,  with  money  ruling  at  4%.  If  no  more  than  1%  were  added 
to  the  dividend,  this  would  readily  carry  the  stock  to  from  $165  to 


422  LOUISVILLE  &  NASHVILLE 

$175  per  shave  on  earnings  as  solid  and  management  as  conservative 
as  that  of  this  company.  If  the  south  should  experience  no  serious 
setback,  and  the  traffic  of  the  road  no  more  than  hold  its  own,  it  is 
not  improbable  that  a  7%  dividend  would  be  paid,  and  eventually  an 
8%  dividend. 

On  a  5%  basis,  Louisville  &  Nashville  sold  up  to  a  high  point  of 
$159  per  share  in  1902,  a  figure  reached  largely  through  the  re- 
markable occurrence  of  that  year  already  detailed ;  it  sold  off  to  $95 
in  the  year  following.  On  a  6%  basis  it  touched  $157  in  1905,  and 
about  the  same  figure  n  January  of  1906.  In  the  very  heavy  de- 
cline in  the  spring  of  1907  it  sold  off  to  $108  per  share.  This  is 
probably  a  bed  rock  figure.  It  is  probable  that  purchased  at  any- 
thing like  $125  per  share  or  better,  its  general  tendency  would  be 
considerably  above  this  figure,  and  it  is  obvious  that  if  the  road 
were  taken  over  by  the  Atlantic  Coast  Line,  at  a  guarantee  of  7% 
or  8%,  it  would,  with  the  strong  backing  of  this  company,  tend  to 
sell  on  a  4%  basis ;  that  is  to  say,  at  from  $175  to  $200  per  share. 


MAINE  CENTRAL  RAILROAD. 

The  Maine  Central  is  a  subsidiary  company  of  the  Boston  & 
Maine,  the  latter  owning  the  majority  of  its  capital  stock.  It  is 
operated  in  close  connection  with  the  Boston  &  Maine,  and  has  the 
same  president  as  the  latter. 

The  road  represents  the  consolidation  of  Maine  railroads  in 
1862,  and  the  larg-er  part  of  its  mileage  lies  within  that  state. 

The  main  line  of  the  road  extends  from  Portland,  through 
Bangor  to  Vanceboro,  on  the  Canadian  border,  and  again  to  Calais 
and  Eastport,  at  the  extreme  easterly  sea  line  of  the  state.  Another 
important  branch  extends  from  Portland  northwesterly  through  the 
White  Mountains  to  Lime  Ridge  in  Canada,  connecting  with  the 
Canadian  Pacific  and  the  Quebec  Central.  It  operates  a  total  of  816 
miles,  and  this  mileage  has  not  changed  materially  in  recent  years. 

Ownership. 

The  directorate  of  1906  included  five  directors  of  the  Boston  & 
Maine — Lucius  Tuttle,  president ;  Samuel  C.  Lawrence,  Medford, 
Mass. ;  Lewis  Cass  Ledyard,  New  York ;  Henry  M.  Whitney,  an  im- 
portant figure  in  New  England  financial  affairs,  Brookline,  Mass., 
and  Alvah  W.  Sulloway,  Franklin,  N.  H.  The  other  directors  were 
George  F.  Evans,  vice-president  and  general  manager,  Portland, 
Me.;  Franklin  A.  Wilson,  Bangor;  John  Ware,  Waterville,  Me.; 
United  States  Senator  William  P.  Frye,  Lewiston,  Me. ;  Joseph  W. 
Symonds,  Edward  P.  Ricker,  South  Poland,  Me.,  and  George 
Yarney,  Bangor.    The  road  reported  in  1905,  779  stockholders. 

The  affiliations  of  the  road  are  naturally  those  of  the  Boston 
&  Maine. 

Capitalization. 

On  June  30th,  1906,  the  capital  account  of  the  road  stood  as 
follows : 

(423) 


424  MAINE  CENTRAL 

Common    stock $  4,976,100 

Other  stock 11,900 

Total   $  4,988,000 

Funded  debt 11,892,192 

Nominal    capital $16,880,192 

Rentals,  capitalized  at  4% 13,779,000 

Approximate  gross  capital $30,659,192 

Securities    held 1,107,624 

Approximate  net  capitalization $29,542,468 

Average  net  capitalization  per  mile $36,204 

Miles   operated 816 

Net  earnings  on  net  capital 5.9% 

Stock  on  net  capital 17% 

Fixed  charges  on  total  net  income 46% 

Factor  of  safety (See  text.) 

The  reports  of  the  road  show  the  capitalization  of  the  leased 
lines,  the  stocks  and  bonds  of  the  latter  amounting  to  $14,500,000. 
This,  it  will  be  seen,  is  very  near  to  the  figure  obtained  by  capital- 
izing at  4%  the  rentals  paid  by  the  Maine  Central. 

The  estimated  net  capitalization  here  shown  is  rather  low 
for  an  eastern  road,  its  $36,204  per  mile  standing  against  $77,660  per 
mile  for  the  Boston  &  Maine,  and  $103,741  per  mile  for  the  New 
Haven. 

From  the  gross  earnings  there  is  to  be  deducted  $139,000  net 
earnings  from  water  lines,  which  are  included,  however,  in  the  total 
net  income.  On  this  basis  the  net  earnings  show  5.9%  on  the 
estimated  net  capital.  Operating  expenses  were,  however,  very 
heavily  charged,  and  include  items  of  $828,027  expended  for  new- 
equipment  and  $434,553  appropriated  for  second  track,  shops  and 
terminals.  Were  these  two  items  added  to  the  net  earnings,  the 
percentage  shown  would  naturally  have  been  much  higher — about 
10%.  As  it  is,  the  5.9%^  for  the  Maine  Central  stands  against 
5.6%  for  the  Boston  &  Maine  and  8.2%  for  the  New  Haven. 

The  capital  stock  represented  only  17%  of  the  estimated  net 
capitalization,  and,  nominally,  fixed  charges  for  1906  consumed  77% 
of  the  total  net  income.  If,  however,  the  $1,262,580  expended  for 
improvements  noted  above  had  been  included  in  the  total  net  income, 


MAINE   CENTRAL 


425 


the  fixed  charges  would  consume  only  about  46%  of  the  whole. 
As  these  appropriations  were  purely  arbitrary,  it  follows  that  the 
margin  of  safety  for  the  underlying  securities  is  large,  and  as  the 
earnings  of  the  road  are  comparatively  even,  the  bonds  of  the  road 
are  a  gilt  edge  class  of  security. 

The  company's  holdings  of  stocks  and  bonds  are  small.  The 
especial  items  are  5,934  shares  of  the  Portland  &  Ogdensburg 
Railroad  and  5,451  of  the  Boston  &  Canada  Railway,  these  and  other 
items  being  carried  on  the  books  at  a  total  valuation  of  $1,107,624. 

In  the  five  years  from  1901  the  nominal  capitalization  of  the 
road  has  slightly  decreased  through  the  discharge  of  bonds,  while 
the  gross  earnings  have  increased  23%.  This  is  an  excellent 
showing. 

Character  and  Stability  of  Traffic. 

The  Maine  Central  does  a  very  general  transportation  business ; 
its  passenger  earnings  represent  nearly  40%  of  the  gross  earnings ; 
and  its  freight  tonnage  is  widely  distributed,  there  being  no  single 
item  of  any  importance.  While  the  mileage  operated  has  not  in- 
creased within  the  last  ten  years,  the  gross  earnings  per  mile  have 
risen  from  $7,191  to  $9,381.  This  increase  has  been  very  even,  as 
the  following  table  will  show : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1900-1 

816 
816 
816 
816 
816 
816 

$5,868,547 
6,194,304 
6,541,160 
6,773,560 
7,099,219 
7,655,655 

$7,191 

1901-2 

1902-3 

7,591 
8,016 
8,301 
8,700 
9,381 

1903-4 

1904-5 

1905-6 

The  charges  have  been  as 

follows : 

Year 

Traffic  Density 

Maintenance  per  Mile 

Total* 

Way 

Equipment* 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

404,975 
417,999 
451,458 
486,194 
544,209 

$1,325 
1,413 
1,338 
1,509 
1,813 

$1,316 
1,339 
1,534 
1,003 
1,790 

$2,641 
2,752 
2,872 
2,512 
3,603 

Average.  . .  . 

460,967 

$1,479 

$1,396 

$2,875 

*  Estimated. 


426 


MAINE   CENTRAL 
Maintenance. 


The  reports  of  the  Maine  Central  are  not  made  up  in  the  ordi- 
nary form,  and  included  in  the  maintenance  charges  for  1906  is 
$828,000  paid  for  new  equipment,  which  brings  up  the  estimated 
maintenance  of  equipment  to  a  very  high  figure  per  mile,  as  com- 
pared with  previous  years. 

Maintenance  of  way  was  likewise  charged  on  a  much  higher 
basis  than  in  former  years,  the  total  maintenance  amounting  to 
$3,600  per  mile  as  here  estimated.  This  surcharge  of  maintenance 
is  shown  in  the  increased  percentage  of  operating  expenses,  and  it 
is  safe  to  say  that  on  the  traffic  density  of  the  Maine  Central,  tht 
maintenance  in  former  years  has  been  adequate,  so  that  the  extra 
thousand  dollars  per  mile  apparently  appropriated  for  1906  repre- 
sents a  considerable  surcharge.  This  is  almost  exactly  the  amount 
paid  for  the  new  equipment. 

It  has,  however,  been  the  policy  of  the  road  for  a  series  of  years 
to  make  such  appropriations  from  its  earnings,  the  amount  in  detail 
for  five  years  being  as  follows  : 

1901-2  $637,796 

1902-3  641,920 

1903-4  740,237 

1904-5  191,764 

1905-6  828,027 

From  the  surplus  of  1904-5,  $300,000  was  also  set  aside  for  new 
terminals  at  Bangor,  and  an  additional  $100,000  in  1906. 


Surplus  Earnings. 

While  the  gross  earnings  rose  25%  in  five  years,  the  sur- 
plus shown  has  hardly  made  a  corresponding  increase.  It  is  evident, 
therefore,  that  the  surplus  has  been  adjusted  to  income.  On  this 
account  the  percentage  shown  as  earned  upon  the  common  stock 
is  merely  a  nominal  figure. 

The  items  have  been  as  follows : 


Year 

Surplus 

Dividends 

Earned  on 

Common 

Per  cent. 

Paid  on 

Common 

Average 
Price 

1901-2 

$360,597 
407,201 
431,653 
577,263 
41S.027 

7.2 
8.1 
8.6 
11.5 
8.9 

6 

6 

7 
7 
7 

163 

1902-3 

169 

1903-4 

176 

1904-5 

185 

1905-6 

198 

MAINE   CENTRAL  427 

The  Maine  Central  paid  6%  through  twenty  consecutive  years ; 
that  is  to  say,  from  1884  to  1903  inclusive.  Beginning  with  1904,  it 
has  paid  dividends  at  the  rate  of  7%. 

The  Balance  Sheet. 

The  general  balance  sheet  for  June  30th,  1906,  showed: 

Current  assets $1,956,249 

Sundry   assets 1,441,234 

Total   $3,397,483 

and  current  liabilities $    887,717 

Sundry    items 2,351,636 

Total   $3,239,353 

Leaving  a  balance  of $    158,130 

The  amount  to  the  credit  of  profit  and  loss  was  $1,176,992. 

Investment  Value. 

The  stock  of  the  Maine  Central  is  held  chiefly  in  New  England, 
where  it  is  highly  regarded  by  reason  of  its  conservative  manage- 
ment and  the  uninterrupted  payment  of  dividends  through  good 
years  and  bad.  In  1903,  in  anticipation  of  the  increase  of  the  divi- 
dends, the  stock  touched  $195  per  share;  it  subsequently  sold  off 
in  1904  to  $158,  rising  again  to  $198  in  1906,  and  declining  but  little 
in  the  general  slump  of  1907. 

It  is  obvious  that  this  could  be  due  only  to  the  fact  that  the  road 
is  actually  earning  much  beyond  its  dividend,  and  that  there  is  little 
of  the  stock  for  sale.  In  1905,  the  actual  surplus  earned  was  above 
$1,000,000,  and  in  1906  the  amount,  including  $1,262,000  new  equip- 
ment, second  track  construction,  etc.,  charged  to  operating  ex- 
penses, was  $1,666,000.  If  the  average  of  these  two  years  had  been 
evenly  divided  between  dividends  and  improvements,  this  would  still 
have  justified  12%  or  even  15%  dividends,  or  twice  the  amount 
paid.  It  matters  little  to  the  stockholders  whether  earnings  be  paid 
in  divdends  or  spent  in  betterments,  providing  always  that  the 
money  is  well  spent.  Should  the  favorable  showing  which  the  road 
has  made  be  continued,  the  stock  would  eventually  sell  at  much 
higher  figures  than  any  it  has  yet  reached. 

This  possibility  became  accentuated  by  the  virtual  merger  of 
the  Boston  &  Maine  system  with  the  New  Haven  in  1907. 


MICHIGAN  CENTRAL  RAILROAD. 

The  Michigan  Central  is  little  more  than  one  of  the  larger 
divisions  of  the  New  York  Central.  Nominally  it  is  operated  sep- 
arately, owned  separately,  but  it  has  much  the  same  set  of  directors 
and  officers,  and  the  New  York  Central  owns  90%  of  its  stock. 
It  is  therefore  of  interest  only  for  the  equities  which  the  New  York 
Central  may  have  in  its  earnings. 

In  1898,  for  $16,814,000  par  value  of  stock,  the  New  York 
Central  exchanged  $19,336,000  Zl/2%  collateral  gold  bonds;  i.  e.,  at 
$115  per  share.  A  dividend  of  4%  on  the  stock  just  about  equals  the 
interest  on  the  bonds,  so  that  all  earned  over  4%  is  clear  gain  to  the 
New  York  Central. 

Under  the  Michigan  Central  is  now  included  also  the  Canadian 
Southern,  leased  to  the  Michigan  Central  for  999  years,  the  latter 
guaranteeing  the  interest  on  its  bonds  and  a  2x/2%  dividend  on  the 
$15,000,000  of  the  stock  until  1910,  and  thereafter  at  3%. 

At  the  close  of  1906  the  company  acquired  a  majority  of  the 
capital  stock  of  the  Chicago,  Kalamazoo  &  Saginaw  Railway — 
55  miles — and  during  the  year  it  also  acquired  $3,000,000  par  value 
of  the  common  stock  and  $3,000,000  of  4%  bonds  of  the  Chicago. 
Indiana  &  Southern,  the  balance  of  the  stock  and  the  larger  part 
of  the  bonds  of  that  road  being  owned  by  the  Lake  Shore. 

In  1905  the  road  reported  only  508  shareholders. 

Capitalization. 

As  of  January  1st,  1907,  the  capital  account  stood  as  follows: 

Stock $18,738,000 

Funded  debt 25,265,000 

Canada  Southern  bonds 20,000,000 

Canada  Southern  stock 15,000,000 

Other  leased  line  bonds 1,778,100 

Total   capital $80,781,100 

Rentals  capitalized  at  4% 4,732,755 

(428) 


MICHIGAN  CENTRAL  429 

Approximate  gross  capitalization $85,513,855 

Securities  held 10,833,338 

Approximate  net  capitalization $74,680,517 

Approximate  net  capitalization  per  mile.  .  $42796 

Average  miles  operated 1,745 

Xet  earnings  on  net  capital 6.1% 

Stock  on  net  capitalization 25% 

Fixed  charges  on  total  net  income  (est.) .  .  57% 

Factor  of  safety  (est.) 43% 

It  will  seen  that  the  net  capitalization  for  a  road  earning 
$15,000  per  mile  is  fairly  low.  Yet,  on  the  estimated  net  capital 
the  net  earnings  as  shown  in  the  company's  reports  for  1906 
amounted  to  only  6.1%.  This  figure  is,  however,  misleading. 
Further  reference  to  the  report  will  show  that  the  operating  ratio 
for  1906  was  82.7%.  It  has  been  around  this  figure  for  a  number 
of  years,  and  this  is  due  to  heavy  sums  for  improvements  charged 
directly  to  operating  expenses.  The  operating  ratio  of  the  New 
York  Central  is  about  70%,  the  Lake  Shore  62%,  the  Nickel  Plate 
70%  ;  and  it  is  easy  to  see  that  the  normal  operating  ratio  of  a  road 
of  the  Michigan  Central's  high  standard  would  not  exceed  70%  at 
the  outside.  Net  earnings  concealed  in  the  maintenance  accounts 
have  therefore  been  estimated  for  1906  at  12%.  If  this  amount 
be  added  to  the  net  earnings  shown,  the  percentage  of  net  earnings 
on  net  capital  would  be  equivalent  to  about  8.8%,  and  fixed  charges, 
which  nominally  consumed  80%,  do  not,  in  reality,  consume  above 
57%  of  the  actual  total  net  income. 

The  proportion  of  stock  to  the  total  net  capital  is  small,  33%, 
but  the  earnings  of  the  road  are  very  stable.  For  a  series  of  years 
they  have  shown  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896 

1897 

1,642 
1,658 
1,658 
1,658 
1,635 
1,658 
1,653 
1,653 
1,653 
1,745 
1,745 

$13,821,614 
13,697,239 
14,046,149 
15,504,062 
16,730,131 
18,490,274 
19,045,083 
22,552,201 
21,492,944 
23,283,868 
26,275,588 

$8,416 
8,261 
8,471 
9,351 

10  232 

1898 

1899 

1900 

1901 

11  152 

1£02 

11,527 
13,643 
13,002 
13,343 
15,057 

K03 

K04 

K05 

1906 

Miles  of  second  track,  220. 


430 


MICHIGAN  CENTRAL 


It  will  be  seen  that  in  ten  years  the  earnings  have  very  nearly 
doubled,  and  this  has  been  accomplished  with  a  very  small  increase 
in  capitalization. 

Maintenance. 

For  a  series  of  years  the  traffic  density  and  maintenance  have 
shown  as  follows : 


Year 

Traffic  Density 

Maintenan 

ze  per  Mile 

Total 

Way            Equipment 

1900 

1901 

1,226,914 
1,254,314 
1,188,813 
1,486,839 
1,413,724 
1,574,483 
1,744,591 

$1,616 
2,076 
2,279 
2,098 
1,896 
1,959 

$1,472 
1,667 
1,440 
2,090 
1,972 

.  2.514 

$3,088 
3,743 

1902 

3,719 

1903 

4,188 

1904 

3,868 

1905 

4,473 

1906.. 

2.000                  3.176 

5,176 

Average.  .  .  . 

1,426,077 

$1,989 

$2,047 

$4,036 

The  increase  of  maintenance  charges  for  1906  over  1905,  with 
the  same  mileage  operated,  amounted  to  $1,225,000,  and  the  charges 
for  1905  were  undoubtedly  high.  They  have  been  high  for  years, 
and  represent  a  steady  policy  of  improvements  from  earnings.  It  is 
safe  to  say  that  the  surcharge  in  maintenance  in  1906  was  not 
less  than  $1,200  per  mile,  and  this  amount  on  the  1,745  miles 
operated  would  reduce  the  operating  expenses  to  a  70%  basis. 

Surplus  Earnings. 

It  may  be  assumed,  therefore,  that  the  actual  surplus  for  1906 
was  about  $2,000,000  greater  than  that  shown  in  the  report.  With 
an  increase  of  50%  in  gross  earnings,  the  nominal  surplus  from  1900 
has  shown  as  follows  : 


Year 

Surplus 

Per  cent. 

Earned  on 

Common 

Dividends 

Paid  on 

Common 

1901 

1902 

1903         

$    840,666 
983,297 
1,110,646 
1,244,773 
872,775 
973,453 
987,827 

4.5 

5.2 

5.7 

6. 

4.1 

5.2 

5.2 

4 
4 
4 

4 

1904         

4 

1*105                      

4 

1906 

5 

In  1906  the  stock  was  put  on  a  6%  basis,  so  that,  nominally,  the 
road  did  not  earn  its  dividend  for  that  year.     The  actual  surplus 


MICHIGAN  CENTRAL  431 

earnings  were  at  least  equal  to,  if  they  did  not  exceed,  $3,000,000,  or 
equivalent  to  about  16%  on  the  capital  stock.  If  this  sum  were 
evenly  divided  between  dividends  and  improvements — and  the  most 
conservative  policy  could  scarcely  ask  more — the  road  might  readily 
have  paid  8%.  On  the  most  conservative  basis,  therefore,  the  New 
York  Central's  equity  in  the  earnings  was  at  least  2%  on  the  capital 
stock  owned,  or  about  $330,000  for  1906,  above  the  regular  6% 
dividend. 

The  Michigan  Central  paid  a  4%   dividend  from  1895  up  to 
1906. 

The  Balance  Sheet. 

The  balance  sheet  for  the  end  of  1906  indicated  clearly  enough 
that  the  company  was  in  need  of  working  capital.     It  showed : 

Current  assets $  5,108,037 

Current   liabilities 12,622,228 

Leaving  a  debit  balance  of $  7,514,191 

In  addition  to  the  above  there  were 

Items  of  liabilities  in  suspension  of $  1,906,640 


Making  a  total  adverse  balance  of .  . .  .$  9,420,831 

There  were  loans  and  bills  payable  of  $6,250,000  and  sundry 
accounts  payable  exceeded  accounts  collectable  by  over  $2,500,000. 

The  credit  of  the  company  is  high,  and  the  sale  of  $10,000,000 
3-year  5%  notes  in  January  of  1907  provided  the  company  with 
ample  funds  with  which  to  carry  on  its  improvement  work. 

Investment  Value. 

In  1906  the  Michigan  Central  was  building  the  third  rail 
electric  tunnel  road  under  the  Detroit  River  from  Windsor,  Ontario, 
to  Detroit,  Michigan.  It  will  be  two  and  one-half  miles  long,  and  is 
estimated  to  cost  between  eight  and  ten  million  dollars.  The  bonds 
of  the  Detroit  River  Tunnel  (authorized  issue  $15,000,000)  will  be 
guaranteed  by  the  Michigan  Central.  This  tunnel  will  add  in  the 
neighborhood  of  $400,000  to  the  fixed  charges  of  the  road,  but,  with 
traffic  merely  at  the  present  level,  the  officials  of  the  road  estimate 
that  the  tunnel  will  easily  effect  a  saving  in  the  cost  of  operation  over 
the  present  car  ferry  system  ample  to  provide  for  this  increase.  On 
the  other  hand,  the  construction  of  this  tunnel  will  very  considerably 
transform  the  character  of  the  Michigan  Central  and  its  completion 
should  add  very  materially  to  the  gross  earnings  of  the  road. 


432  MICHIGAN  CENTRAL 

The  double  tracking  of  the  road  from  Chicago  to  Niagara  was 
not  complete  in  1906,  and  this  expenditure  will  call  for  still  further 
loans  or  expenditures  from  earnings. 

The  equipment  of  the  road  is  obviously  inadequate  from  the 
fact  that  it  paid  in  1906  a  balance  of  car  mileage  of  $973,663,  a  con- 
siderable increase  over  the  $770,595  paid  in  1905.  Considerable  ad- 
ditions to  the  rolling  stock  will  therefore  be  required  to  keep  pace 
with  the  growing  traffic  of  the  road. 

In  view,  therefore,  of  the  highly  conservative  dividend  policy 
of  the  Vanderbilt  roads,  it  is  not  improbable  that  the  increase  of 
the  dividend  from  4%  to  6%  in  1906  will  fix  the  dividend  rate  for 
some  years  to  come. 

On  a  6%  basis  the  stock  would  not  be  especially  cheap,  there- 
fore, at  above  $150  per  share.  It  sold  as  high  as  $200  per  share  in 
1906.  There  is  very  little  of  the  stock  to  be  had,  and  while  it  is  as 
solid  as  any  stock  upon  the  list,  there  are  others  with  an  equal  degree 
of  security  on  which  the  return  would  be  higher. 


MINNEAPOLIS  AND  ST.  LOUIS  RAILROAD. 

The  Minneapolis  &  St.  Louis  is  one  of  the  smaller  railroads  of 
the  Mississippi  Valley  which  have  not  yet  been  absorbed  by  any  of 
the  larger  systems.  It  belongs  in  the  Hawley  group,  which  also  owns 
the  Iowa  Central,  and  the  two  roads  have  the  same  operating  offi- 
cers, though  they  report  separately.  The  "Clover  Leaf"  (Toledo, 
St.  Louis  &  Western),  is  controlled  by  much  the  same  set  of  in- 
terests. 

Formerly  distinctly  a  north  and  south  line,  the  company  has 
now  a  line  reaching  from  Minneapolis  to  Watertown  in  South 
Dakota,  and  this  line  is  being  extended  westerly  to  the  Missouri 
River.  It  has  also  a  branch  extending  southward  from  Winthrop  to 
Storm  Lake  in  Iowa,  where  it  joins  the  Illinois  Central. 

History. 

The  original  Minneapolis  &  St.  Louis  was  a  short  line  which 
gave  the  Burlington,  Cedar  Rapids  &  Northern,  and  through  that 
line  the  Rock  Island,  a  route  from  Chicago  to  St.  Paul.  The  road 
was  sold  under  foreclosure  in  1894,  and  the  present  company  is  a 
reorganization  of  that  year.  In  1899  the  company  purchased  from 
the  Wisconsin,  Minnesota  &  Pacific  a  line  into  South  Dakota.  In 
1900  the  new  interests  in  the  road  obtained  control  of  the  Iowa 
Central,  since  which  time  the  two  roads  have  been  operated  together. 

The  extension  to  Storm  Lake,  Iowa,  was  completed  the  same 
year,  and  in  1904  the  Minneapolis  &  St.  Louis  acquired  by  purchase 
a  controlling  interest  in  the  Des  Moines  &  Fort  Dodge,  operating 
157  miles.  Stock  of  a  par  value  of  $2,530,000  out  of  a  total  of 
$4,283,000,  was  obtained  at  a  cost  of  $641,678. 

At  the  close  of  the  fiscal  year  of  1906  the  road  was  operating  a 
total  of  799  miles.  It  runs  mainly  through  farming  country,  but 
the  Iowa  Central  reaches  a  number  of  coal  mines,  which  contribute 
to  the  traffic  of  the  two  roads. 


28 


(433) 


434  MINNEAPOLIS  &  ST.  LOUIS 

Ownership. 

The  directorate  of  1906  included  Edwin  Hawley,  president,  also 
president  of  the  Iowa  Central  and  head  of  the  Hawley  group  of 
roads ;  H.  E.  Huntington,  of  Los  Angeles,  at  the  head  of  a  very 
extensive  system  of  suburban  railways  in  Southern  California ; 
Tames  N.  Wallace,  president  of  the  Central  Trust  Company 
of  New  York ;  also  a  director  in  the  National  Railway  of 
Mexico ;  John  E.  Searles,  president  of  the  Tennessee  Northern ;  Levi 
C.  Weir,  president  of  the  Adams  Express  Company,  also  a  director 
in  the  Norfolk  &  Western ;  George  Crocker  and  F.  E.  Palmer,  New 
York ;  L.  F.  Day,  vice-president,  and  F.  IT.  Davis,  treasurer  of  the 
road. 

The  directorate  of  the  Iowa  Central  includes  much  the  same 
group,  with  the  addition  of  Theodore  P.  Shouts,  president  of  the 
Clover  Leaf,  and  Paul  Morton,  president  of  the  Equitable  Life  As- 
surance Society. 

Capitalization. 

For  the  purpose  of  extending  its  line  westward  from  Water- 
town,  South  Dakota,  the  road  issued  $5,000,000  of  notes  in  1905. 
The  notes  are  secured  by  the  entire  issue  of  capital  stock  and  the 
first  mortgage  bonds  of  the  construction  company,  and  at  the  close 
of  the  fiscal  year  of  1906  the  road  had  on  deposit  with  the  Central 
Trust  Company  of  New  York  securities  valued  at  $4,767,997. 

The  road  also  guarantees,  both  as  to  principal  and  interest,  the 
first  mortgage  bonds  of  the  Des  Moines  &  Fort  Dodge.  Including 
all  these  items,  its  capital  account  on  June  30th,  1906,  stood  as 
follows : 

Common  stock $  6,000,000 

Preferred  stock 4,000,000 

Total  stock $10,000,000 

Funded  debt  (net) 19,070,000 

Des  Moines  &  Fort  Dodge  guaranteed  bonds    3,072.000 
Five  year  notes 5,000,000 

Total   capital $37,142,000 

Securities  held . 5,996,997 

Approximate  net  capital $31,145,003 


MINNEAPOLIS  &  ST.  LOUIS  435 

Approximate  net  capital,  per  mile $38,978 

Average  miles  operated 799 

Net  earnings  on  net  capital 5.0% 

Stock  on  net  capitalization 31% 

Fixed  charges  on  total  net  income 77% 

Factor  of  safety 23% 

The  rentals  received  about  balance  the  rentals  paid,  so  that 
this  was  a  negligible  item. 

The  capitalization  per  mile  compared  with  other  lines  in  the 
same  territory  is  undoubtedly  high,  the  average  of  $38,978  per  mile 
comparing  with  $33,900  for  the  St.  Paul,  $32,057  for  the  North 
Western,  and  $29,128  for  the  Burlington.  And  where  all  three  of 
these  roads  earned  in  the  neighborhood  of  $8,000  per  mile,  the 
Minneapolis  &  St.  Louis  in  1906  earned  only  $4,664. 

This  fact  of  over-capitalization  is  further  attested  by  the  fact 
that  the  net  earnings  for  the  flush  year  of  1906  represented  only  5% 
on  the  estimated  net  capitalization.  This  for  a  western  road  was 
very  low.  The  same  figure  on  the  St.  Paul  was  9.8%,  on  the 
North  Western  10.5%,  and  for  the  Burlington  8.7%. 

Nor  is  this  over-capitalization  largely  represented  by  harmless 
stcck  on  which  no  dividends  are  being  paid.  Of  the  estimated  net 
capitalization  the  stock  represents  only  31%.  The  combined  result 
of  these  factors  is  that  in  1906,  even  after  extremely  modest  main- 
tenance charges,  the  fixed  charges  consumed  77%  of  the  Total  Net 
Income. 

This  left  a  Factor  of  Safety  for  the  relatively  large  amount  of 
funded  debt  of  only  23%,  and  it  is  to  be  remembered  that  these  rep- 
resent the  proportions  in  a  year  of  almost  unparalleled  prosperitv 
for  the  territory  through  which  it  runs. 

The  securities  owned  by  the  company  are  principally  the  stocks 
or  bonds  of  subsidiary  organizations,  in  none  of  which  does  there 
lie  equities  of  any  importance. 

Increase  of  Capitalization. 

Dating  from  1898,  the  mileage  taken  over  by  the  reorganized 
company  has  been  rather  more  than  doubled.  Comparing  the  capi- 
talization at  the  beginning  and  end  of  this  period,  we  find  that  in 
1898  the  company  had  outstanding  stocks  and  bonds  to  the  amount 
of  $22,500,000,  and  in  1906,  excluding  the  borrowings  for  new  con- 
struction, $32,142,000.  This  was  an  increase  of  about  46%.  In  the 
meanwhile  gross  earnings  increased  67%.    It  will  be  seen  therefore, 


436 


MINNEAPOLIS  &  ST.  LOUIS 


that  the  over-capitalization  dates  from  the  reorganization  of  the 
road,  and  that  the  company  is  now  earning  considerably  more  on 
its  invested  capital. 

Stability  of  Earnings. 

Of  the  company's  revenue  freight,  nearly  one-half  is  farm 
products,  the  balance  being  distributed  over  coal,  lumber  and  general 
merchandise.  Passenger  earnings  are  relatively  high,  contributing 
nearly  30%  of  the  gross  earnings  in  1906. 

Comparing  the  earnings  of  the  road,  it  will  be  seen  that  the 
extensions  of  the  road  since  the  reorganization  have  considerably 
reduced  its  average  earnings  per  mile,  the  items  for  a  series  of  years 
comparing  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896 

1897 

370 

366 

436 

514 

633 

633 

642 

642 

730* 

799* 

$2,006,505 
2,246,584 
2,500,004 
2,863,308 
3,275,504 
3,540,840 
3,265,472 
2,850,565 
3,076,756 
3,726,665 

$5,424 
6,141 

1898-9 

1899-0 

1900-1 

6,001 
5,568 
5,174 

1901-2 

1902-3 

1903-4 

1904-5 

5,593 
5,086 
4,440 
4,212 

1905-6 

4,664 

*  Includes  Des  Moines  &  Fort  Dodge  Ry. 

This  reduction  in  the  average  earnings  per  mile  is  in  the 
contrary  direction  to  most  western  roads,  and  indicates  the  inherent 
weakness  of  the  line.  Its  tracks  run  through  a  relatively  well-set- 
tled farming  country,  and  a  large  part  of  the  traffic  is  local  busi- 
ness. The  line  does  not  connect  any  important  terminals,  and  for 
this  reason  it  is  almost  entirely  dependent  upon  the  very  gradual 
growth  of  its  territory. 

Maintenance. 


It  will  be  seen  from  the  following  table  that  the  traffic  density 
of  the  line  is  very  low,  and  that  instead  of  increasing,  as  has  been 
true  generally  of  western  roads  in  a  very  notable  degree,  this  traffic 
density  has  declined  with  the  doubling  of  the  mileage  of  the  road. 
The  items  compare  as  follows : 


MINNEAPOLIS  &  ST.  LOUIS 


437 


Traffic  Density 

1 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

370,728 
345,809 
279,832 
240,426 
255,612 
276,813 

$  939 
1,036 
732 
483 
463 
556 

$485 
440 
474 
473 
450 
515 

$1,424 

1,476 

1,206 

956 

913 

1,071 

Average.  .    . 

294,870 

$701 

$473 

$515 

Wis.  Central   . 
C.  &N.  W.... 
St.  Paul 

715,270 
640,983 
601.003 

$793 
991 
929 

$700 

858 
632 

$1,493 
1,849 
1,561 

Corresponding  with  this  decline  in  the  average  traffic  density 
has  been  a  corresponding  decline  in  the  appropriations  for  main- 
tenance from  nearly  $1,500  per  mile  in  1900-1  to  a  little  over  a 
thousand  dollars-  per  mile  in  1906,  but  this  reduction  has  been  rather 
heavier  than  the  reduction  in  average  traffic,  so  that  the  road  could 
hardly  have  been  as  well  maintained  in  1906,  as,  for  example,  in  the 
two  years  noted. 

Comparison  is  introduced  with  three  roads  which  lie  in  more  or 
less  the  same  territory.  It  will  be  seen  that,  traffic  densities  com- 
pared, the  average  maintenance  for  six  years  for  the  Minneapolis  & 
St.  Louis  seems  favorable,  but  it  is  quite  impossible  to  maintain 
one  road  of  half  of  the  traffic  density  of  another  for  half  the  average 
expenditure  per  mile.  And  on  none  of  the  three  roads  put  in  com- 
parison has  maintenance  been  very  liberal.  In  the  case  of  the  St. 
Paul  it  has  been  notably  low.  It  seems  fairly  certain,  therefore,  that 
this  is  about  bedrock  maintenance  for  the  Minneapolis  &  St.  Louis, 
and  that  no  surplus  earnings  are  concealed  in  this  item. 

Furthermore,  where  the  North  Western  and  the  St.  Paul,  for 
example,  set  aside  large  sum  for  earnings  from  improvements,  no 
specific  appropriations  of  this  sort  have  been  made  by  this  com- 
pany, and  the  amount  carried  to  credit  of  profit  and  loss  is  not 
large. 

Surplus  Earnings. 

The  nominal  surplus  shown  before  dividend  payments  for  six 
years  has  been  asfollows: 


438 


MINNEAPOLIS  &  ST.  LOUIS 


Dividend 

Per  cent. 

Dividend 

Year 

Surplus 

Paid  on 

Earned  on 

Paid  on 

Average 

Preferred 

Common 

Common 

Price 

1900-1.... 

$553,762 

5 

5.8 

4 

89 

1901-2.... 

696,724 

5 

8.3 

5 

110 

1902-3.... 

511,915 

5 

5.1 

5 

75 

1903-4. . . . 

298,078 

5 

1.6 

2 

54 

1904-5. . . . 

257,495 

5 

1. 

— 

70 

1905-6. . . . 

416,029 

5 

3.6 

— 

75 

It  will  be  seen  that  from  1901  to  1902  there  was  a  rather  sharp 
decline,  and  in  1904  the  dividend  payment  on  the  common  stock  was 
passed,  and  has  not  since  been  resumed.  In  1905,  for  example, 
after  the  lowest  maintenance  per  mile  of  any  of  the  years  under 
view,  the  5r'f  on  the  preferred  was  barely  earned. 

Dividend  Record. 

\\  ith  the  reorganization  of  the  company  there  were  two  classes 
of  preferred,  the  first  preferred  being  retired  in  1899,  bonds  being 
substituted.    The  record  of  dividend  payments  is  as  follows : 


1st 
Preferred 

Preferred 

Common 

1895 

1896 

3f  (8mo's.) 
5 
5 
2£ 

3 
3 

Sole  Pref. 
4i 
5 
5 
5 
5 
5 
5 

1897 

1898 

1899 

1900 

4 

1901 

1902-3 

5 

1904 

2i 

1905 

1906 

The  Balance  Sheet. 

The  balance  sheet  of  the  company  is  not  made  up  in  the  usual 
form.  At  the  close  of  the  fiscal  year  of  1906,  excluding  from  the 
current  assets  the  items  of  securities  owned  and  likewise  of  material 

on  hand,  there  were  net  assets  of  only $    364,205 

Against  this  there  were  liabilities  of 1,174,747 

Leaving  a  debit  balance  of $    810,542 

There  were  deferred  assets,  including  securities  on  deposit  for 
construction  borrowings,  of  $5,842,518,  against  which  there  were 
deferred  liabilities  of  $5,454,323. 


MINNEAPOLIS  &  ST.   LOUIS  439 

The  item  of  cash  in  the  current  assets  was  $235,622.  It  does 
not  appear  from  the  balance  sheet  that  the  company  was  in  very 
good  shape  for  working  capital. 

Investment  Value. 

The  preferred  stock  is  entitled  to  5%  non-cumulative  dividends, 
and  after  5%  has  been  paid  on  the  common,  both  classes  of  stock 
share  alike.  The  full  5%  on  the  preferred  has  been  paid  for  six 
years,  and  the  5%  on  the  common  in  both  1901  and  1902.  The 
increased  surplus  shown  tended  to  give  a  solid  appearance  to  the 
stock,  and  in  1901  the  preferred  sold  as  high  as  $124  per  share,  and 
in  the  boom  of  1902,  $127.  It  declined  to  $80  per  share  in  1904, 
and  in  1906  ranged  between  $90  and  par. 

By  reference  to  the  table  above  it  will  be  seen  that  in  the 
two  years  of  1904  and  1905  the  preferred  dividend  was  barely 
earned,  even  after  low  maintenance  charges.  Even  in  the  generally 
prosperous  year  of  1906  there  was  no  great  margin  of  surplus  after 
the  dividend  payments.  These  things  considered,  the  average  in- 
vestor will  probably  not  regard  the  preferred  as  a  very  solid 
security,  and  should  high  money  rates  continue,  the  stock  will 
probably  tend  to  sell  lower  rather  than  higher. 

Under  the  5%  dividends  paid  in  1902  and  1903,  the  common 
stock  sold  above  par,  reaching  $115  per  share  in  1902.  When  the 
dividend  was  passed  in  July  of  1904,  as  it  had  to  be,  the  stock  sold 
down  to  $40  per  share.  In  1906  it  ruled  at  generally  high  prices, 
reaching  $84  in  the  January  boom. 

It  is  difficult  to  see  on  what  basis  these  prices  were  reached 
unless  the  control  of  the  road  could  have  been  picked  up  in  the 
market.  It  is  true  that  a  stock  which  has  recently  paid  dividends 
tends  to  sell  higher  even  after  dividends  are  passed  than  of  a 
company  with  equal  earnings  on  which  no  dividends  have  recently 
been  paid.  The  investor  will  not  fail  to  take  note  of  the  fact  that 
the  surplus  shown  has  declined  rather  than  increased  in  the  largely 
prosperous  years  of  1905-6,  and  it  is  not  clear  that  the  extensions  of 
the  road  in  progress  will  tend  very  materially  to  swell  the  sums 
available  for  dividends.  There  are  on  the  market  a  number  of  non- 
dividend  securities  with  regard  to  which  the  reverse  is  true;  that  is 
to  say,  where  earnings  and  surplus  have  been  steadily  increasing, 
and  where  a  surplus  is  shown,  after  large  amounts  for  improvement 
work  have  been  charged  off  to  operating  expenses,  and  the  main- 
tenance figures  have  been  extremelv  liberal.  Some  of  these  stocks 
were  selling  in  1906  at  half  the  quotations  shown  for  Minneapolis 


440  MINNEAPOLIS  &  ST.  LOUIS 

&  St.  Louis  common.  Especially  as  regards  wheat-raising  territory, 
which  the  road  reaches,  the  year  of  1906  was  of  such  extraordinary 
prosperity  as  to  make  cautious  investors  apprehensive  of  its  con- 
tinuance. Security  buyers  of  this  class  probably,  therefore,  will  not 
look  upon  the  showing  made  by  this  company  as  indicating  great 
possibilities  for  its  stock. 


MINNEAPOLIS,     ST.    PAUL  AND  SAULT    STE. 

MARIE    RAILROAD. 

The  Sault  Ste.  Marie,  or  as  it  is  familiarly  known,  the  "Soo," 
is  virtually  the  Canadian  Pacific  Railway  in  the  United  States,  the 
latter  road  owning  a  majority  of  its  capital  stock  and  guaranteeing 
a  large  proportion  of  its  bonds.  The  road  has  been  extending  rapidly 
within  recent  years,  and  at  the  close  of  the  fiscal  year  of  1906 
showed  a  total  mileage  of  2,135  miles. 

The  road  extends  from  the  Falls  of  Saint  Mary,  at  the  extreme 
eastern  end  of  Lake  Superior,  westward  through  peninsular  Michi- 
gan and  northern  Wisconsin  to  Minneapolis  and  St.  Paul,  and 
thence  northwesterly  to  Portal,  in  North  Dakota,  on  the  Canadian 
boundary,  with  extensive  branches  carrying  the  line  from  Glenwood, 
Minn.,  to  Winnipeg;  from  Hankinson,  N.  D.,  through  Bismarck  to 
Plaza,  and  from  Thief  River  Falls  in  northern  Minnesota  to  Ken- 
mare,  N.  D. 

Both  at  its  eastern,  northern  and  western  terminals  it  meets 
with  the  lines  of  the  Canadian  Pacific,  and  virtually  forms  a  second 
track  for  this  road  through  middle  Canada  into  the  province  of 
Saskatchewan. 

The  road  is  a  consolidation,  in  1888,  of  the  Minneapolis,  Sault 
Ste.  Marie  &  Atlantic,  the  Minneapolis  &  St.  Croix,  the  Minne- 
apolis &  Pacific,  and  the  Aberdeen,  Bismarck  &  Northwestern. 

During  the  year  of  1906  the  Thief  River  line  was  opened  for 
business,  together  with  several  branches  in  North  Dakota,  and  the 
extensions  under  way  will  bring  up  the  length  of  the  road  operated 
in  1907  to  nearly  2,200  miles. 

Of  the  mileage  operated,  632  miles  lie  east  of  Minneapolis; 
1,483  west.  The  peculiarity  of  the  road  is  that  the  eastern  line  is 
not  profitable,  and  that  the  eastern  portion  is  supported  out  of  the 
earnings  of  the  western  portion.  It  follows,  therefore,  that  as  the 
western  portion  is  developed,  the  burdens  of  the  eastern  portion  be- 
come relatively  lighter. 

The  last  five  years  have  been  years  of  extraordinary  prosperity 
for  Minnesota  and  Dakota,  and  it  is  this  which  accounts  for  the 
favorable  change  in  the  fortunes  of  this  road. 

(441) 


442      MINNEAPOLIS,  ST.  PAUL  &  SAULT  STE.  MARIE 

Ownership. 

Slightly  more  than  half  of  both  the  common  and  the  preferred 
stock  is  owned  by  the  Canadian  Pacific,  together  with  $3,933,000 
par  value  of  the  4%  consolidated  bonds.  In  addition  to  this  the 
Canadian  Pacific  guarantees  4%  interest  on  all  of  the  outstanding 
bonds  assenting  to  a  reduction  of  interest  to  this  rate. 

Although  the  road  is  thus  owned  outright  by  the  Canadian 
Pacific,  and  runs  in  close  affiliation  with  the  latter,  it  is  separately 
officered,  and  only  three  representatives  of  the  Canadian  Pacific 
appear  in  the  directorate.  These  are  Sir  Thomas  Shaughnessy. 
president  of  the  Canadian  Pacific;  Sir  William  Van  Home,  chair- 
man of  the  board,  and  R.  B.  Angus,  all  of  Montreal.  The  other 
directors  are  Thomas  Lowry,  president ;  E.  Pennington,  vice-presi- 
dent and  general  manager ;  W.  L.  Martin,  second  vice-president 
and  traffic  manager;  W.  D.  Washburn,  C.  PI.  Pettit,  Alfred  H. 
Bright  and  G.  R.  Newell,  of  Minneapolis,  and  E.  A.  Young,  of  St. 
Paul. 

Capitalization. 

The  capital  account  on  June  30th,  1906,  stood  as  follows : 

Common  stock $14,000,000 

Preferred  stock 7,000,000 

Total  stock $21,000,000 

Funded  debt 50,115,000 

Total   capital $71,115,000 

Rentals  capitalized  at  4% 15,339,000 

Approximate  capital $86,454,000 

Approximate  capitalization  per  mile $42,800 

Average  miles  operated 2,020 

Net  earnings  on  net  capitalization 6.7% 

Stock  on  total  capitalization 24% 

Fixed  charges  on  total  net  income 44% 

Factor  of  safety 56% 

The  amount  of  the  securities  of  the  road  held  in  the  treasury  is 
so  small  ($441,000)  that  it  has  been  neglected  in  the  above  table. 

It  will  be  seen  that  the  average  capitalization  per  mile  for  a 
prairie  line  of  the  character  of  the  "Soo"  is  decidedly  high,  com- 


MINNEAPOLIS,  ST.  PAUL  &  SAULT  STE.  MARIE  443 

paring  with  $59,512  per  mile  for  the  Northern  Pacific,  $42,362  per 
mile  for  the  Great  Northern,  and  $28,613  for  the  Canadian  Pacific. 

On  the  face  of  the  returns,  and  in  the  extremely  prosperous  year 
of  1906,  the  net  earnings  showed  a  fair  percentage  on  the  estimated 
net  capitalization — 6.7%.  The  figures  for  the  net  earnings  shown 
by  the  report,  however,  were  obtained  through  skimping  operating 
charges  in  a  fashion  not  followed  by  well-managed  American  roads. 
Had  the  maintenance  charges  for  the  year  been  up  to  the  level  of 
the  usual  American  practice,  the  increase  would  have  added  from 
three-quarters  of  a  million  to  a  full  million  dollars  to  the  operating 
expenses,  and  cut  down  the  net  earnings  shown  by  this  amount. 

If  such  a  reduction  be  made,  the  percentage  of  net  earnings  on 
net  capitalization  would  be  nearer  5^%,  which  is  a  rather  low- 
figure  for  a  western  road.  It  compares  with  10.1%  for  the  Great 
Northern  and   10.5%   for  the  Northwestern. 

Nor  is  the  larger  part  of  this  capitalization  in  the  form  of 
harmless  stock.  It  will  be  seen  that  three-quarters  of  the  estimated 
capitalization  is  interest-bearing  debt,  or  its  equivalent,  rentals. 
This  debt,  however,  carries  a  low  rate  of  interest,  taxes  are  light, 
and  the  fixed  charges  for  1906  consumed  only  44%  of  the  net  earn- 
ings shown.  Even  if  the  operating  expenses  had  been  charged  in 
the  usual  fashion  of  American  roads,  with  the  corresponding  re- 
duction in  the  available  net  income,  the  fixed  charges  for  1906 
would  have  required  only  a  little  more  than  half  of  the  resulting 
amount,  so  that  on  the  basis  of  1906,  the  factor  of  safety  for  the 
bonded  debt  amounted  to  well  around  50%. 

Holding  very  few  securities,  and  having  no  land  grants,  the 
equities  of  the  road  are  negligeable. 


Increase  of  Capitalization. 

The  rapid  growth  of  the  line  through  the  Dakotas  and  into 
Canada  has  called  for  a  considerable  outlay  of  capital.  This  has 
been  met  entirely  by  the  issue  of  bonds,  the  capital  stock  of  the  road 
not  having  been  increased  since  the  reorganization  of  the  company 
in  1888. 

The  comparison  of  the  six  years  is  as  follows  : 


Year 

Common 
Stock 

Preferred 

Stock  7% 

Funded 

Debt 

Total 
Capital 

Gross 
Earnings 

1899-0 
1905-6 

$14,000,000 
14,000,000 

$7,000,000   $33,043,023 
7,000,000      50,115,00 

$54,043,023 
71,115,000 

$5,151,187 
11,574,461 

Increase  over  six  years:    Total  capital,  30%;    gross  earnings,  124%. 


444  MINNEAPOLIS,  ST.  PAUL  &  SAULT  STE.  .MARIE 

The  new  constructions  in  North  Dakota  have  been  extremely 
profitable,  it  being  stated  that  some  of  the  new  lines,  as,   for  ex- 
ample, the  Winnipeg  line,  paid  from  the  beginning  of  operation? 
It  is  largely  these  new  constructions  which  have  lifted  the  road  to 
its  present  position. 

Character  of  Traffic. 

The  most  considerable  single  item  in  the  freight  movement  of 
the  road  is  lumber,  amounting  to  37%.  After  this  comes  grain, 
flour  and  other  mill  products  amounting  to  over  30%  ;  the  rest  is  a 
widely  distributed  miscellany.  Carrying  wheat  eastward,  carrying 
lumber  westward,  constitute  the  principal  business  of  the  road. 

Passenger  earnings  bring  in  about  21%  of  the  gross  earnings. 

Stability  of  Earnings. 

The  following  table  shows  the  results  of  operations  since  1897. 
It  will  be  seen  that  in  these  ten  years  the  mileage  has  nearly  doubled, 
the  gross  earnings  have  much  more  than  doubled,  and  even  the  earn- 
ings per  mile  have  increased  about  75%. 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1897-8 

1,195 
1,272 
1,286 
1,312 
1,396 
1,464 
1,530 
1,774 
2,020 

$4,132,699 
4,348,585 
5,151,187 
4,517,375 
6,222,387 
7,237,264 
6,993,498 
8,716,621 

11,574,461 

$3,458 

1898-9 

3,470 

1899-0.. 

4,006 

1900-1 

1901-2 

1902-3 

1903-4 

3,442 
4,455 
4,943 
4,571 

1904-5 

1905-6 

4,913 

5,728 

The  heavy  increase  of  $800  per  mile  in  1906  is  noteworthy- 
Prosperity  in  the  wheat  fields  seems  to  run  in  long  cycles,  and  the 
highly  favorable  conditions  of  recent  years  resulted  in  1906  in  an- 
other wild  "land  boom"  for  the  Northwest,  through  which  the 
earnings  of  the  roads  in  this  territory  were  heavily  swollen.  This  is 
not  the  sort  of  traffic  that  makes  for  solidity,  and  the  culmination  of 
these  boom  periods  is  regarded  with  apprehension  by  careful  in- 
vestors. Nevertheless,  it  is  unquestionably  true  that  the  Northwest 
is  in  a  far  better  shape  than  it  was  to  meet  such  bitter  years  as  fol- 
lowed the  collapse  of  the  early  nineties,  and  much  more  able  to 
stand  a  period  of  depression. 

Another  factor  to  be  taken  into  consideration  is  that  the  aver- 
age rate  per  ton  received  by  the  road  in  1906  was  in  excess  of  the 
rate  for  the  previous  year,   rising  from  72  cents  to  78  cents,  th,.' 


MINNEAPOLIS,  ST.  PAUL  &  SAULT  STE.  MARIE  445 

difference   on  the   total   freight  traffic   for  the   year  amounting  to 
$400,000  in  the  gross  receipts. 

It  is  to  be  noted  that  an  increase  in  rates  is  not  in  the  general 
line  of  western  railroad  development,  and  that  in  less  prosperous 
days  the  opposite  tendency  would  probably  be  shown. 

Maintenance. 

The  following  shows  the  sums  devoted  to  maintenance  over  a 
period  of  six  years : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

407,687 
442,511 
482,083 
443,510 
497,455 
536,606 

$472 
490 
547 
461 
419 
505 

$363 
374 
450 

477 
497 
539 

$835 
864 
997 
938 
916 

1,044 

Average.    .  . 

468,308 

$482 

$450 

$932 

Can.  Pac 

Gt.  Nor 

458,589 
650,321 
729,102 

850 

960 

1,300 

1,002 
594 
791 

1,852 
1,554 
2,091 

It  will  be  seen  that  with  an  average  traffic  density  about  the 
same  as  that  of  the  Canadian  Pacific,  the  average  maintenance 
charges  in  1906  for  the  "Soo"  were  about  $800  per  mile  less.  This 
is  a  very  considerable  figure,  and  on  over  two  thousand  miles  of 
operated  road  would  make  a  deep  cut  into  the  nominal  surplus  shown 
in  the  report.  Furthermore,  it  was  shown  in  the  discussion  on  the 
Canadian  Pacific's  maintenance,  that  the  charges  of  that  road  are 
rather  below  those  of  other  Pacific  roads,  with  the  possible  excep- 
tion of  the  Great  Northern. 

At  the  most  conservative  estimate,  the  maintenance  charges  foi 
1906  would  have  been  at  least  50%  higher  than  they  were,  or  a 
difference  of  $500  per  mile,  if  the  usual  practice  of  American  roads 
had  been  followed.  This  difference  of  $500  per  mile  would  have 
meant  the  addition  of  $1,000,000  to  the  operating  expenses. 

The  figures  shown  for  the  operating  expenses  appear  to  add 
further  testimony  of  inadequate  maintenance.  In  the  face  of  the  fact 
that  the  average  of  operating  expenses  for  all  the  roads  of  the 
United  States  is  about  68%,  and  that  on  some  of  the  best  managed 
roads  of  the  country  they  are  above  70'/(  ,  an  operating  ratio  of  50% 
seems  absurd.     It  will  generally  be  found  that,  as  in  the  case  of 


446  MINNEAPOLIS,  ST.  PAUL  &  SAULT  STE.  MARIE 


the  "Soo,"  it  is  secured  by  insufficient  appropriations  for  the  up- 
keep of  the  road.  Had  $1,000,000  hcen  added  to  the  operating  ex- 
penses, the  latter  would  have  been  increased  by  nearly  one-fifth, 
and  the  operating  ratio  brought  up  accordingly  to  about  60%, 
still  a  low  figure. 

Improvements. 

Nor  have  the  insufficient  maintenance  charges  been  offset  by 
large  sums  in  special  appropriations  from  the  nominal  surplus 
shown.  The  amount  for  1901-2  was  $300,000;  for  1903,  $200,000; 
for  1904,  $250,000;  and  no  appropriation  at  all  was  made  in  1905. 
From  the  surplus  of  1906,  $1,050,000  was  set  aside  for  the  improve- 
ment fund,  which  is  just  about  the  amount  here  estimated  as  re- 
quired for  adequate  maintenance. 

Surplus  Earnings. 

The  sums  devoted  in  previous  years  to  improvements  were  quite 
insufficient  to  bring  the  maintenance  charges  up  to  the  usual 
American  standard,  and  in  order  to  do  this,  there  would  therefore 
be  further  reductions  from  the  items  of  surplus  earnings  shown 
below.  The  nominal  surpluses  shown  by  the  company,  charging  its 
operating  expenses  after  the  fashion  indicated,  have  been  for  six 
years,  as  follows : 


Year 

Surplus 

Dividends      Per  cent. 
Paid  on       Earned  on 
preferred       Common 

Dividends 
Paid  on 
Common 

Average 

Price 
(Calendar 

Year) 

1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 

$    327,873 
1,586,501 
1,664,497 
1,387,246 
2,063,415 
3,267,686 

7 
7 

? 

7.8 

8.4 

6.4 

11.2 

19. S 

2 
4 
4 
4 

20 
25 
60 
60 
75 
117 

On  the  theory  that  an  average  of  three-quarters  of  a  million 
dollars  might  have  been  annually  turned  back  into  the  road  in  the 
six  years  under  view,  without  doing  it  any  harm,  the  average  sur- 
plus up  to  1906  would  have  about  paid  the  full  7%  dividend  on  the 
preferred  stock,  but  have  left  very  little  for  the  common — scarcely 
enough  to  have  justified  a  dividend  before  the  year  of  1905. 

But  the  year  of  1906  was  one  of  exceptional  prosperity  for 
the  road,  and  even  if  a  full  million  dollars  had  been  added  to  the 
operating  expenses  for  maintenance,  there  would  have  still  re- 
mained  a   sufficient   surplus   to   enable   the   road   to   set   aside   the 


MINNEAPOLIS,  ST.  PAUL  &  SAULT  STE.  MARIE  447 

$1,050,000  which  it  did  for  improvement  fund,  pay  its  full  7%  on 
the  preferred,  and  still  leave  between  8%  and  9%  for  the  common. 
Should  this  prosperity  continue,  the  directors  could  conservatively 
put  the  road  on  a  6%  basis  and  still  leave  something  over  for  the 
credit  of  profit  and  loss. 

The  full  dividends  on  the  preferred  have  been  paid,  beginning 
from  1903,  and  the  same  year  2%  was  paid  on  the  common,  and 
4%  since  that  time. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906  the  road  showed  current 
assets  of  $4,230,857;  current  liabilities,  including  interest  and  taxes, 
and  car  trust  notes  ($40,184)  of  $2,756,871,  leaving  a  working 
balance  of  $1,473,986. 

The  item  of  cash  was  exceptionally  large,  amounting  to  $3,176,- 
580. 

The  amount  to  the  credit  of  profit  and  loss  (itemized  as  in- 
come account)  was  $5,413,109. 

This  showed  the  road  in  excellent  condition  with  regard  to  its 
working   capital. 

Investment  Value. 

The  rise  in  the  stocks  of  the  road  since  1900  has  been  very 
rapid,  corresponding  to  the  improved  earnings  and  the  increased 
business,  due  to  the  extension  of  the  road  into  the  Northwest.  In 
1900  the  preferred  sold  as  low  as  $47  per  share,  rising  to  $139  in 
1902,  declining  to  $109  in  the  following  year,  and  rising  to  a  record 
figure  of  $183  in  January  of  1906.     It  sold  at  $123  in  March,  1907. 

The  preferred  stock  is  entitled  to  non-cumulative  dividends  up 
to  7%,  and  then  after  7%  has  been  paid  on  the  common,  it  shares 
equally  with  the  latter.  Inasmuch  as  absolute  control  is  held  by  the 
Canadian  Pacific,  the  balance  of  the  stock  has  no  value  otherwise 
than  as  an  investment.  Should  the  Northwest  undergo  no  serious 
setback  as  came  in  the  nineties,  it  would  not  be  long,  at  the  present 
rate  of  increase,  before  the  full  7%  was  being  paid  on  the  common. 
There  would  then  be  a  prospect  for  a  further  increase  in  the  pre- 
ferred dividend.  Under  the  parentage  of  such  a  great,  powerful 
system  as  the  Canadian  Pacific,  the  road  is  in  an  exceptionally  favor- 
able situation  both  for  the  maintenance  of  its  traffic  and  the  financing 
of  such  new  issues  as  may  be  required  for  extensions,  at  favorable 
rates. 

The  cautious  investor,  however,  will  probably  consider  that  the 
larger  part  of  the  earning  power  of  the  road  lies  in  a  country  that 


448  MINNEAPOLIS,  ST.  PAUL  &  SAULT  STE.  MARIE 

has  been  settled  very  rapidly,  within  a  few  years,  and  that  it  would 
not  be  at  all  surprising  if  the  road  failed  to  show  so  rapid  an  increase 
in  the  coining  five  years  as  in  the  previous  period.  In  other  words, 
the  stock  presents  a  considerable  speculative  risk,  and  is  scarcely 
entitled  to  sell  as  high,  on  the  basis  of  its  present  earnings,  as  the 
stocks  of  other  roads  which  have  added  less  mileage  in  recent  years, 
and  cover  a  more  stable  and  settled  territory. 

The  rise  in  the  price  of  the  common  stock  has  been  equally 
rapid.  It  sold  as  low  as  $14  per  share  in  1900,  rising  to  $84  in  1902, 
and  declining  to  $42  in  1903.  In  1905  it  rose  to  $145,  touching  the 
record  price  of  $164  in  March  of  1906.  In  May  of  1907,  it  soil 
at  $90. 

The  average  price  for  1906  was  above  $150,  and  this  for  a  4% 
stock  could  only  have  been  made  in  anticipation  of  a  very  consider- 
able increase  in  the  dividend.  The  19%  which  the  figures  for  1906 
show  as  earned  on  the  common,  over  and  above  the  preferred  divi- 
dend, were,  as  has  been  explained  already,  somewhat  delusive,  and 
it  seems  doubtful  if  a  conservative  policy  such  as  characterizes  the 
Canadian  Pacific,  would  justify  more  than  a  6%  dividend  at  the 
present  time.  On  a  6%  basis  it  is  not  clear  that  the  stock  should 
sell  for  more  than  does  the  Pennsylvania,  and  in  comparison  with 
this  and  other  roads,  the  figures  for  1906  seem  very  high.  A  50% 
increase  in  dividend  is  considerable,  and  not  generally  undertaken  on 
a  single  year,  or  even  two  years,  of  exceptional  prosperity. 

Considering  its  ownership,  its  management,  and  its  excellent 
prospects,  investors  who  look  rather  to  the  possible  increase  in  the 
value  of  the  stock  than  the  actual  return  they  receive  in  dividends, 
would  doubtless  regard  the  stock  as  an  attractive  purchase  at  some- 
where around  the  low  price  of  1907.  But  the  western  territory  into 
which  the  road  reaches  has  been  the  scene  of  very  heavy  railroad 
extensions  within  the  last  few  years,  and  unless  the  era  of  de- 
pressions has  gone  by,  it  is  scarcely  possible  that  the  flush  conditions 
in  these  states  will  undergo  no  check. 

While  the  unexpected  may  always  happen,  for  those  who  seek 
a  safe  place  for  their  money,  an  extra  degree  of  caution  will  scarcely 
go  amiss  in  considering  the  securities  of  companies  like  this.  The 
stock  is  attractive  rather  to  speculative  buyers  of  the  type  willing 
to  take  large  chances  for  the  sake  of  large  possible  gains. 


MISSOURI,  KANSAS  AND  TEXAS  RAILWAY. 

Some  years  ago,  the  Missouri,  Kansas  &  Texas — the  "Katy/ 
as  it  is  familiarly  known,  was  set  down,  in  a  work  on  American 
railroads,  as  a  road  of  the  "nowhere  to  nowhere"  variety.  In  ten 
years,  however,  its  situation  has  very  materially  changed,  and  it  is 
now  a  well  organized  north  and  south  road  from  Missouri  and 
Kansas  to  the  Gulf,  and  a  line  towards  which  several  of  the  larger 
systems  cast  covetous  eyes.  It  runs  through  a  rich  and  growing  ter- 
ritory, but  it  was  long  handicapped  by  a  heavy  burden  of  debt,  the 
legacy  of  a  reckless  or  dishonest  management.  Spite  of  this,  it  has 
struggled  through  and  was  able  to  pay,  in  1906,  on  its  preferred 
stock  the  first  dividend  in  its  history. 

History. 

The  Missouri,  Kansas  &  Texas  was  organized  in  1870,  through 
the  consolidation  of  the  southern  branch  of  the  Union  Pacific  and 
several  small  lines  operating  in  southern  Missouri.  Partly  by  absorp- 
tion of  other  small  lines,  partly  by  new  construction,  the  line  was 
extended  southward  through  Indian  Territory,  being  aided  by  large 
land  grants,  aggregating  one  million  acres,  in  Kansas  and  Indian 
Territory.  In  1880,  then  operating  879  miles,  it  came  under  the 
Gould  influence,  and  was  leased  to  the  Missouri  Pacific.  The  result 
was  disastrous  to  the  road,  it  being  managed  for  the  benefit  of  the 
lessor  company.  A  large  floating  debt  was  run  up,  maintenance 
neglected,  and  the  property  reduced  to  a  deplorable  condition.  In 
1888  it  defaulted  its  interest  payments,  and  in  the  process  of  reor- 
ganization it  escaped  from  the  Gould  domination. 

Conditions  required  a  drastic  plan  of  reorganization,  but  this 
was  not  followed  out.  Practically  no  new  capital  was  provided, 
and  it  was  under  this  heavy  handicap  that  the  new  management, 
under  the  presidency  of  Henry  C.  Rouse,  undertook  the  upbuilding 
of  the  road.  In  ten  years,  900  miles  have  been  added  to  the  system, 
and  its  lines  now  reach  from  St.  Louis,  Hannibal  and  Kansas  Citv 
on  the  north,  to  San  Antonio  and  Galveston  on  the  south,  with 
numerous  branches.     Much  of  the  old  track  has  been  relaid,  con 

2«  (449) 


450  MISSOURI,  KANSAS  &  TEXAS 

siderable  sums  have  been  set  aside  from  surplus  for  improvements, 
and  in  1906  the  road  closed  the  most  prosperous  year  of  its  existence. 

The  M.,  K.  &  T.  has  been  a  highly  independent  road,  and  has 
practically  no  affiliations  with  other  systems.  Up  to  1904-5,  the 
Rockefeller  interests  were  supposed  to  be  dominant  in  the  road, 
John  D.  Rockefeller  and  William  Rockefeller  being  included  in  it- 
directorate,  and  Colgate  Hoyt,  associated  in  the  Rockefeller  interests, 
was  for  some  time  vice-president  of  the  road.  All  of  these  three 
have  disappeared  from  the  directorate,  which  now  includes  no 
prominent  representative  of  the  Standard  Oil  interests. 

Upon  the  death,  in  1906,  of  Henry  C.  Rouse,  long  president 
and  later  chairman  of  the  board,  Adrian  H.  Joline,  for  some  years 
general  counsel  of  the  Toledo  &  Southwestern,  who  came  to  the 
M.,  K.  &  T.  as  its  general  counsel,  became  chairman  and  later  presi- 
dent of  the  road.  In  1906  the  directorate  included  Mr.  Joline  and 
five  of  the  operating  officers  of  the  road :  F.  M.  Finney,  then  presi- 
dent ;  A.  A.  Allen,  vice-president  and  general  manager ;  Charles  C. 
Hedge,  vice-president  and  treasurer ;  R.  W.  Maguire,  comptroller, 
and  James  Hagerman,  general  counsel.  The  rest  of  the  board  was 
made  up  by  Henry  W.  Poor,  of  H.  W.  Poor  &  Co.,  bankers,  New 
York ;  A.  J.  Poor,  of  Chapman,  Kansas ;  James  Brown  Potter,  a 
New  York  lawyer  and  capitalist ;  ex-Governor  Myron  T.  Herrick 
and  Otto  Miller,  of  Cleveland,  Ohio;  B.  P.  McDonald,  Fort  Scott, 
and  E.  B.  Stevens,  of  Parsons,  Kansas ;  H.  J.  de  Marez  Oyens,  Am- 
sterdam, Holland,  and  Alfred  Waldron  Smithers,  London,  England. 

In  1905  the  road  reported  1,509  shareholders. 

Capitalization. 

On  June  30th,  1906,  the  capital  account  stood  as  follows : 

Common  stock $     63,300,300 

Preferred  stock  13,000,000 

Other  stock 3,922,500 

Total   $    80,222,800 

Mortgage  bonds 104,234,000 

Equipment  bonds 240,732 

Nominal  capital $  184,697,532 

Rentals  capital  at  4% 11.487,500 

Approximate    capital $  196,185,032 


MISSOURI,  KANSAS  &  TEXAS  451 

Approximate  capitalization  per  mile ....  $64,470 

Miles    operated 3,043 

Net  earnings  on  net  capital 3.3% 

Stock  on  net  capital 41% 

Fixed  charges  on  total  net  income 75% 

Factor  of  safety 25% 

In  the  estimate  of  capitalization  the  company's  treasury  hold- 
ings are  too  small  to  be  considered.  It  will  be  seen  that  the  estimated 
capitalization  per  mile  is  high  for  a  "prairie  road."  Its  $64,470  per 
mile  compares  with  $30,725  per  mile  for  the  Missouri  Pacific,  and 
with  $46,710  per  mile  for  the  St.  Louis  &  San  Francisco,  occupying 
much  the  same  territory. 

The  high  capitalization  is  further  reflected  in  the  showing  of  the 
net  earnings  on  the  estimated  capitalization,  amounting  to  only  3.3%. 
This  figure  stands  against  7.7%  for  the  Missouri  Pacific,  and  against 
4.8%  for  the  St.  Louis  &  San  Francisco.  Moreover,  the  heavy  capi- 
talization of  the  road  is  not  represented  in  the  form  of  harmless 
stock;  but  bonded  debt  is  high,  and  the  stock  represents  only  41% 
of  the  estimated  capitalization  of  the  road. 

The  burden  under  which  the  road  has  struggled  so  long  is  still 
further  reflected  in  the  relation  of  fixed  charges  to  the  total  net 
income.  Fixed  charges  for  a  long  time  practically  consumed  all  of 
the  earnings  of  the  road,  and  even  in  the  unusually  prosperous  year 
of  1906,  required  75' ,   of  the  total  net  income. 

The  nominal  factor  of  safety  on  the  securities  of  the  road,  even 
in  the  exceptional  year  of  1906,  amounted  to  only  25%. 

The  company  has  practically  no  holdings  in  other  companies, 
and  therefore  has  no  outside  equities  to  add  to  its  assets. 

Increase  of  Capitalization. 

In  six  years  the  total  capital  increased  27%,  and  the  gross  earn- 
ings 70%.  a  very  substantial  difference,  indicating  steady  progress 
towards  better  conditions.    The  items  of  increase  were  as  follows: 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt 

Total 

Gross 
Earnings 

1900 
1906 

$55, 181,000 
63,300,300 

$13,000,000 

3,012,500 

13,000,000 

3,922,500 

$73,523,000 

104,234,000 
240,732 

$144,716,500 
184,097,532 

$12,626,511 
21,159,144 

452 


MISSOURI,  KANSAS  &  TEXAS 
Character  of  Traffic. 


The  most  considerable  item  in  the  traffic  of  the  road  is  coal, 
which  in  1906  amounted  to  over  one-quarter  of  the  total  tonnage; 
lumber  made  up  10%,  farm  products  and  animals  about  30%,  manu- 
factures, 18%.  Of  farm  products,  cotton  made  up  only  A]/2%  of  the 
gross. 

Passenger  earnings  contributed  25%  of  the  gross  earnings  of 
the  road. 

It  will  be  seen  that  the  traffic  is  widely  distributed,  and  reflects 
the  varied  character  of  the  territory  of  the  road. 

Stability  of  Earnings. 

As  the  table  reveals,  the  gross  earnings  have  about  doubled  in 
ten  years,  while  the  mileage  operated  has  increasel  only  50%.  The 
result  has  been  an  increase  in  the  gross  earnings  per  mile  from 
$5,140  to  $6,953.  The  new  mileage  has  tended  to  reduce  the  average 
earnings  per  mile  from  1901  to  1906. 


Year 


1895-6 
1896-7 
1897-8 
1898-9 
1899-0 
1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


Miles  Operated 

Gross  Earnings 

Per  Mile 

2,147 

$11,036,987 

$5,140 

2,197 

11,478,315 

5,224 

2,197 

12,047,237 

5,483 

2,200 

11,930,334 

5,424 

2,218 

12,626,512 

5,692 

2,265 

15,403,083 

6,800 

2,500 

16,391,400 

6,556 

2,601 

17,208,193 

6,616 

2,884 

17,766,595 

6,160 

3,043 

20,041,095 

6,586 

3,043 

21,159,144 

6,953 

Maintenance. 
The  efforts  of  the  management  of  the  road  have  been  to  bring 
it  up  to  a  much  higher  standard  of  efficiency,  and  in  pursuance  of 
this  policy,  the  maintenance  charges  have  been  as  heavy  as  the 
earnings  of  the  road  would  justify.    The  items  are  as  follows : 


Year 


Traffic  Densitv 


Maintenance  per  Mile 


War 


Equipment 


Total 


1900-1.... 
1 901-2 

1 902-3 

1903-4.... 
1904-5.... 
1 905-6 

Average. 


576,023 
558,684 
531,477 
426,431 
418,385 
460,359 

495,226 


§1,243 
1,058 
1,068 
733 
1,197 
1,231 

$1,121 


$601 

$1,844 

599 

1,657 

634 

1,702 

559 

1,492 

632 

1,829 

671 

1,902 

$616 


$1,737 


MISSOURI,  KANSAS  &  TEXAS 


453 


St  L.  &  S.  F. 
St.  L.  S.  W . , , 

K.  C.  Sou 

Atchison 


448,625 
408,066 
837,406 
577,005 


703 

674 

1,156 

1,113 


1,517 
1,697 
2,117 
2,236 


The  average  of  $1,100  per  mile  for  maintenance  of  way  on  a 
road  with  a  traffic  density  of  495,000  ton-mile  per  mile  of  road  re- 
flects this  policy.  The  average  of  $616  per  mile  for  maintenance 
of  equipment  is  rather  low,  but  in  addition  to  the  regular  mainten- 
ance, the  following  amounts  have  been  appropriated  from  surplus 
earnings  for  new  equipment  : 

1902-3  $1,160,800 

1903-4  1,353,900 

1904-5  1,238,200 

1905-6  594,700 


$4,347,600 


The  report  does  not  specify  the  separate  items  of  repairs,  but 
during  the  year  the  road  added  thirty  new  locomotives  and  2,200 
new  freight  cars.    These,  however,  were  not  paid  for  from  earnings. 


Surplus  Earnings. 

The  surplus  shown  has  steadily  increased,  so  that  in  1906  a  2% 
dividend  for  the  half  year  was  paid  on  the  preferred  stock,  the 
beginning,  it  is  hoped,  of  steady  dividends  to  the  full  4%  the  stock 
is  entitled  to.  It  is  to  be  noted,  however,  that  had  the  same  sums 
been  set  aside  for  new  equipment  from  earnings  as  in  the  three  pre- 
ceding years,  the  full  dividend  on  the  preferred  could  not  have  been 
paid.  In  the  table  below  the  per  cent,  of  earnings  is  shown  on  the 
preferred  stock,  and  before  any  payment  has  been  made  for  equip- 
ment appropriations.  After  deducting  $594,000  from  the  surplus, 
the  percentage  earned  on  preferred  in  1906  was  only  8.1%. 


Year 

Surplus 

Dividends 

Paid  on 

Preferred 

Per  cent. 
Earned  on 
Preferred 

1900-1.... 

$799,916 
908,940 
1,099,916 
1,066,368 
1,267,191 
1,653,087 

6.1 

1901-2.... 

6.9 

1902-3. . . . 

8.4 

1903-4. . . . 

8.2 

1904-5. . . . 

9.7 

1005-6. . . . 

4 

12  7 

454  MISSOURI,  KANSAS  &  TEXAS 

In  1906  and  in  the  three  years  preceding,  before  any  deduc- 
tions were  made  the  surplus  showed  about  1%  annually  on  the 
common  stock,  over  and  above  the  full  4%  dividend  on  the  pre- 
ferred. 

The  Balance   Sheet. 

At  the  close  of  the  fiscal  year  of  1906,  the  balance  sheet  showed : 

Current  assets  of $4,091,969 

Current  liabilities  of 1,957,378 

Leaving  a  working  balance  of $2,134,591 

In  addition  to  the  items  of  current  liabilities,  there  were  taxes 
and  interest  accrued,  but  not  due,  amounting  to  $1,631,806. 

The  amount  to  credit  of  profit  and  loss  was  $1,739,314. 

Investment  Value. 

In  anticipation  of  a  dividend,  M.,  K.  &  T.  preferred  sold  up  to 
$69  per  share  in  1('02,  declining,  however,  to  $32  in  1004.  Tt  rose 
to  $74  in  January,  1906,  which  is  the  highest  figure  it  has  yet 
reached. 

It  has  already  been  noted  that  the  first  semi-annual  dividend 
of  2}i%  on  the  preferred,  paid  in  1906,  was  more  or  less  at  the  ex- 
pense of  a  reduction  of  the  amounts  previously  appropriated  for  new 
equipment.  It  is  this  fact  probably  which  accounts  for  the  failure 
of  the  stock  to  rise  to  a  higher  figure  upon  the  beginning  of  divi- 
dends. If,  however,  the  earnings  of  the  road  should  continue  to 
increase  in  the  same  favorable  ratio  as  in  the  last  five  years,  the 
margin  of  safety  for  the  dividends  on  this  stock  would  be  steadily 
enlarged,  and  even  at  the  highest  figures  of  1906  would  represent 
a  fairly  attractive  investment.  If,  however,  on  a  surplus  showing 
not  greatly  inferior  to  that  of  1906,  the  stock  could  sell  off  in  the 
general  decline  of  1903-4  to  $32  per  share,  it  is  not  unreasonable  to 
suppose  that  should  another  decline  come,  it  would  go  much  below 
the  high  figures  of  1906. 

Reviewing  the  steady  progress  of  the  road,  considering  its 
excellent  management,  and  the  rapidly  developing  resources  of  its 
territory,  and  especially  of  the  new  state  of  Oklahoma,  the  far 
sighted  investor  will  probably  conclude  that  if  purchased  on  reces- 
sions and  put  away,  the  stock  should  yield  a  handsome  profit  in  a 
few  years.  Nothing  apparently  but  a  decline  in  prosperity  over 
the  whole  country,  could  materially  affect  the  earning  power  of  the 


MISSOURI,  KANSAS  &  TEXAS  455 

road.  The  payment  of  the  equipment  trusts  through  the  issue  of 
bonds  will  eventually  effect  a  considerable  saving  to  the  road,  and 
should  contribute  to  the  safety  of  the  dividend  on  the  preferred. 

The  amount  of  the  preferred  stock  is  small,  while  that  of  the 
common  is  comparatively  large.  A  surplus,  therefore,  which  would 
represent  a  very  considerable  degree  of  safety  for  the  preferred 
dividend  would  not  readily  lend  itself  to  the  payment  of  a  dividend 
on  the  common.  Moreover,  if  the  conservative  policy  of  the  road, 
in  returning  a  considerable  portion  of  the  surplus  towards  better- 
ments, should  be  continued,  it  would  be  some  time  before  a  dividend 
on  the  common  should  reasonably  be  expected. 

It  may  be  taken,  therefore,  that  the  common  stock  is  of  value 
only  for  a  long  pull  investment;  but,  on  the  other  hand,  M.,  K.  &  T. 
i?  one  of  the  "low-priced"  stocks,  which,  like  the  Denver  &  Rio 
Grande,  the  Erie  and  others,  fluctuate  within  wide  limits,  according 
to  the  general  conditions  of  the  money  market.  For  example,  in 
1901-2  it  sold  up  to  $35  per  share,  slumping  off  to  less  than  $15  in 
1904.  It  was  run  up  to  $40  per  share  in  the  general  rise  of  1906. 
To  all  practical  intents  it  has  had  as  much  value  in  one  year  as  in 
another.  If  on  a  general  decline  it  should  sell  down  to  anything 
like  the  figures  of  1903-4,  that  is  to  say,  below  $20  a  share,  it  would 
undoubtedly  present  an  attractive  speculation,  and  unless  there  were 
a  very  long  depression  like  that  of  1893-7,  it  would  probably  rise 
again  with  the  general  improvement  of  the  market.  Bought  as  an 
investment  at  something  like  these  figures,  and  held  for  a  number 
of  years,  it  would  probably  show  a  good  profit  to  its  holder;  but 
as  an  investment  without  regard  to  the  eccentricities  of  the  stock 
market,  it  would  probably  be  generally  regarded  as  inferior  to  the 
preferred. 


MISSOURI  PACIFIC  RAILWAY. 

The  Alissouri  Pacific  is  the  chief  of  the  Gould  railways  and 
the  head  of  the  vast  system  of  lines  which  gridirons  the  interior 
southwest  lying  between  the  Mississippi  and  the  Rockies,  and  extend- 
ing into  Colorado  and  to  the  Great  Salt  Lake. 

The  Missouri  Pacific  operates  directly  over  six  thousand  miles 
of  railroad,  the  make-up  of  the  main  "Gould  Systems"  standing  as 
follows : 

Miles. 

Missouri  Pacific   6,276 

St.   Louis   Southwestern    1,452 

Texas  &  Pacific  1,826 

International  &  Great  Northern 1,160 

Denver  &  Rio  Grande 2,477 

Rio  Grande  Southern 180 

Total  miles   13,371 

To  these  may  be  added  the  Wabash  and  the  Wabash  &  Pitts- 
burg Terminal,  the  Wheeling  &  Lake  Erie,  and  the  Western  Mary- 
land, with  3,600  miles  more,  which  brings  the  total  of  Gould  mileage 
up  to  nearly  17,000  miles.  With  the  completion  of  the  Western 
Pacific,  the  total  will  reach  over  18,000  miles.  The  Gould  lines  com- 
prise one  of  the  five  largest  systems  in  the  country  under  practically 
single  control,  and  when  the  Western  Pacific  is  completed  they  will 
make  up  the  only  transcontinental  line  in  the  United  States  under 
practically  one  ownership. 

History. 

The  present  company  was  the  consolidation  in  1880  of  the 
Missouri  Pacific  and  several  minor  roads.  The  original  line,  the 
Pacific  Railway  of  Missouri,  was  chartered  as  far  back  as  1849,  to 
build  from  St.  Louis  to  Kansas  City,  receiving  an  advance  from 
the  state  of  seven  million  dollars,  in  addition  to  a  land  grant  of  about 
sixteen  hundred  thousand  acres.  The  line  was  not  completed  to 
Kansas  City  until  1865.  In  1876  the  road  was  sold  under  foreclosure 
and  came  under  the  control  of  Gould  interests  and  has  since  so 

(456) 


MISSOURI  PACIFIC  457 

remained.  In  1881  the  Missouri  Pacific  practically  absorbed  the  St. 
Louis,  Iron  Mountain  &  Southern,  and  for  a  time  operated  the 
Missouri,  Kansas  &  Texas,  the  Texas  &  Pacific  and  other  roads 
under  leases,  these  leases  being  afterwards  surrendered.  In  1892 
complete  control  of  the  International  &  Great  Northern  was  secured, 
and  of  the  Central  Branch  of  the  Union  Pacific  in  1898-9,  the  latter 
road  being  now  operated  as  a  part  of  the  Missouri  Pacific  system. 
In  1901  a  large  interest  in  the  Denver  &  Rio  Grande  was  acquired, 
sufficient,  with  the  Rockefeller  holdings,  it  is  understood,  to  ensure 
control  of  that  property. 

The  peculiarity  of  the  company  is  that  the  Missouri  Pacific 
proper  is  a  minor  part  of  the  system,  the  latter  contributing  only 
fifteen  millions  of  the  gross  earnings  as  against  over  twenty-one 
millions  for  the  St.  Louis  &  Iron  Mountain,  the  balance  of  the  gross 
being  supplied  by  branch  lines,  of  which  the  chief  is  the  Kansas  & 
Colorado  Pacific. 

The  Missouri  Pacific  and  branch  lines  extend  from  St.  Louis 
westerly  to  Pueblo  in  Colorado,  where  they  join  the  Rio  Grande 
with  a  network  of  branching  lines  in  eastern  Kansas  and  western 
Missouri.  The  Iron  Mountain  lines  lead  southerly  from  St.  Louis  to 
Texarkana  in  Texas,  and  Alexandria  in  Louisiana,  at  both  of  which 
points  they  join  the  Texas  &  Pacific.  Throughout  the  most  of  its 
length  the  Iron  Mountain  nearly  parallels  the  St.  Louis  &  South- 
western. 

The  "watergrade"  line  from  St.  Louis  to  New  Orleans  (in 
connection  with  the  Texas  &  Pacific)  was  completed  in  1906. 

Ownership. 

The  directing  head  of  the  Gould  lines  and  president  of  the 
Missouri  Pacific,  the  Texas  &  Pacific  and  other  lines  is  George  Jay 
Gould,  and  Gould  interests  control  the  property  absolutely.  The 
directorate  of  1906  was  made  up  of  George  Jay  Gould,  Frank  Jay 
Gould,  vice-president,  Edwin  Gould,  president  of  the  St.  Louis 
Southwestern ;  Howard  Gould  and  Charles  S.  Clarke,  vice-president, 
St.  Louis,  Mo.,  directly  representing  the  Gould  interests. 

The  Rockefeller  interests  were  represented  by  Frederick  T. 
Gates.  John  D.  Rockefeller,  Jr.,  having  retired  from  the  directorate 
in  1905,  his  place  was  taken  by  James  Henry  Smith,  of  New  York, 
one  of  the  chief  owners  of  the  St.  Paul,  and  representative  of  the 
George  Smith  Estate.  The  other  directors  were :  Samuel  Sloan, 
formerly    president    and    now    chairman    of    the    board    of    man- 


458  MISSOURI   PACIFIC 

agers  of  the  Lackawanna;  S.  Davies  Warfield,  of  Baltimore;  W. 
K.  Bixby,  and  O.  L.  Garrison,  of  St.  Louis,  and  James  H.  Hyde, 
representing  the  Hyde  estate  of  New  York. 

The  executive  committee  was  made  up  of  George,  Frank  and 
Edwin  Gould,  F.  T.  Gates,  James  Henry  Smith,  Samuel  Sloan  and 
S.  Davies  Warfield.  In  1907,  Stuyvesant  Fish,  late  president  of  the 
Illinois  Central,  entered  the  board  and  the  executive  committee, 
taking  the  place  of  J.  H.  Smith,  deceased. 

The  St.  Louis  &  Iron  Mountain,  of  which  the  Missouri  Pacific 
owns  practically  all  of  the  capital  stock,  has  a  separate  directorate- 
made  up  entirely  in  the  Gould  interest.  The  same  is  true  of  the 
Central  Branch  Railway. 

The  stock  of  the  Missouri  Pacific  is  not  widely  held,  the  road 
reporting  in  1905  only  1,861  stockholders,  as  against  17,500  for  the 
Atchison,  and  14,000  for  the  Union  Pacific. 

Capitalization. 

The  Missouri  Pacific  reports  are  exceptionally  full  in  some  re- 
gards, quite  unsatisfactory  in  others,  in  particular  the  exhibit  as 
to  the  income  account.  Some  six  millions  of  gross  earnings  on  the 
"Branch  Lines."  are  not  itemized;  and  against  it,  it  is  difficult  to 
segregate  the  stocks  and  bonds  of  the  roads  reported  in  the  earnings 
of  the  "system."  Deducting  from  the  book  value  of  securities  owned 
by  all  the  component  companies,  the  stocks  of  the  Iron  Mountain 
and  the  Central  Branch,  the  capital  account,  June  30th,  1906,  stood 
about  as  follows  (The  net  amount  paid  for  rentals  of  leased  lines, 
after  deducting  rentals  received,  was  very  small,  and  need  not  be 
taken  into  consideration)  : 

Capital    stock    $  77,817,875 

St.  L-,  I.  M.  &  S.  (balance  outstanding)  51,973 
Funded  Debt — 

Missouri  Pacific   85,012,000 

St.  L.,  I.  M.  &  S 97,873,304 

Central  Branch  5,959,000 

Leased    Lines 4,012,000 

Equipment  obligations  (total) 12,906,000 

Gross  capital   $283,632,152 

Securities  held  (including  St.  L.  &  I.  M. 

S.  holdings) 84,801,285 

Approximate  net  capital   $198,830,867 


MISSOURI  PACIFIC  459 

Approximate  net  capital,  per  mile $30,725 

Average   miles   operated 6,276 

Net  earnings  on  net  capitalization 7.7% 

Stock  on  net  capitalization 39% 

Fixed  charges  on  total  net  income 60% 

Factor  of   Safety 40% 

It  will  be  seen  that  the  gross  capitalization  of  the  Missouri 
Pacific  system  amounts  to  about  $45,000  per  mile,  but  both  the 
Missouri  Pacific  proper  and  the  St.  Louis  &  Iron  Mountain  hold 
large  quantities  of  securities  carried  on  the  books  at  a  cost  of  $136,- 
000,000.  From  this  may  be  deducted  $7,585,000  par  value  of  the 
stock  of  the  Central  Branch  Railway;  and  the  Iron  Mountain 
stock  of  $44,000,000  par  value,  originally  exchanged  in  1881  on  the 
basis  of  three  shares  of  Missouri  Pacific  stock  for  four  shares  of  the 
Iron  Mountain.  The  Iron  Mountain  earned  in  1906  over  9%  on 
its  capital  stock,  practically  all  of  which  was  turned  into  the  treasury 
of  the  Missouri  Pacific.  This  stock  is  therefore  a  valuable  asset 
and  is  probably  carried  upon  the  books  at  below  its  market  worth.    . 

On  the  other  securities  owned  by  the  two  companies,  there  were 
received  over  $3,500,000  in  dividends  and  interest  in  1906,  which,  on 
the  balance  of  $84,801,285,  nominal  book  value  of  these  securities 
after  deducting  the  par  value  of  the  two  stocks  noted,  amounted  to 
well  over  4%.  These  large  holdings  therefore  are  apparently  well 
worth  the  amount  at  which  they  are  carried  on  the  books  of  the 
company,  and  may  legitimately  be  deducted  from  the  gross  capitali- 
zation of  the  system. 

When  these  deductions  are  made  it  will  be  seen  that  the  capitali- 
zation of  the  system  per  mile  is  comparatively  low,  amounting  to 
only  $30,725,  comparing  with  a  similar  estimate  of  $64,470  per  mile 
for  the  M.,  K.  &  T.,  of  $58,887  per  mile  for  the  Atchison,  and  $46,- 
710  per  mile  for  the  St.  Louis  &  San  Francisco,  companies  occupying 
very  much  the  same  sort  of  territory  as  the  Missouri  Pacific.  The 
fact  as  to  this  low  capitalization  is  directly  contrary  to  the  general 
impression,  which  regards  the  Gould  roads  as  usually  much  over- 
capitalized. 

On  this  estimate  of  net  capitalization,  the  net  earnings  of  the 
system  represented  7.7%,  as  against  similar  estimates  of  3.3%  for 
the  M.,  K.  &  T.,  5.9%  for  the  Atchison,  and  4.8%  for  the  St.  Louis 
&  San  Francisco. 

Of  the  estimated  net  capitalization  the  stock  of  the  Missouri 
Pacific  represents  a  little  over  one-half,  and  of  the  total  net  income 


460  MISSOURI  PACIFIC 

derived  from  the  operation  of  the  combined  roads,  60%  is  con- 
sumed by  fixed  charges,  indicating  a  generally  high  rate  of  interest 
on  the  bonded  debt.  The  factor  of  safety  for  all  the  underlying 
securities  of  the  system  would  on  this  estimate  be  40%. 

Equities  Owned. 

Aside  from  the  $44,000,000  of  Iron  Mountain  stock  already 
discussed,  the  most  valuable  single  asset  held  in  the  treasury  of  the 
two  companies  is  $23,668,000  par  value  of  the  second  mortgage 
income  bonds  of  the  Texas  &  Pacific  Railway,  on  which  the  holding 
roads  received,  in  1906,  the  full  5%  to  which  the  bonds  were 
entitled. 

These  bonds  were  exchanged  for  an  equivalent  of  65%  of  the 
St.  Louis  &  Iron  Mountain  gold  bonds,  so  that  the  Iron  Mountain 
is  paying  4%  and  receiving  the  equivalent  of  7^4%,  which,  if  the 
rate  of  payment  can  be  maintained,  would  add  50%  to  the  cost 
valuation  of  these  bonds. 

All  the  stock  of  the  Central  Branch  Railway,  amounting  to 
$7,585,000,  is  held  by  the  Missouri  Pacific,  and  from  this  road  the 
Missouri  Pacific  received,  in  1906,  in  dividends,  $1,061,900.  This 
was,  however,  a  payment  from  surplus,  and  the  net  surplus  available 
for  dividend  over  all  fixed  charges  shown  by  the  Central  Branch  in 
1906  was  $1,402,000,  equivalent  to  5%  on  the  face  value  of  the  stock. 
The  other  items  of  income  were  widely  distributed  over  a  mass  of 
securities  which  are  listed  in  full  in  the  report,  but  not  itemized  as 
to  their  cost,  save  as  to  total.  Practically  all  the  earnings  to  which 
these  stocks  are  entitled  are  received  by  the  holding  companies,  so 
that  the  latter  have  no  extensive  equities  unrealized. 

On  the  Denver  stock,  5%  is  paid  on  the  $7,300,000  par  value  of 
the  preferred,  making  the  average  return  on  the  purchase  a  little 
over  2^2%,  but  in  view  of  the  prosperity  of  the  road  there  should 
be  some  increment  in  value  over  the  cost  price. 

Increase  of  Capitalization. 

Since  1900  both  stock  and  funded  debt  have  increased  about 
50%.  In  the  same  period  gross  earnings  have  increased  only  46%. 
\  considerable  part  of  the  increase  both  in  stock  and  bonds  has  been 
applied  to  the  purchase  of  the  securities  of  other  roads,  as  the 
Denver  and  Wabash  stocks  and  the  Wabash  debentures,  so  that  in 
reality  the  gross  earnings  of  the  system  have  increased  more  than 
the  net  increase  of  the  capitalization.    The  items  stand  as  follows : 


MISSOURI  PACIFIC 


461 


Year 

Common 
Stock 

Funded 
Debt  (System) 

Total 
Capital 

Gross 
Earnings 

1900 

1906 

$50,432,150 
77,817,875 

$138,539,556 
205,862,505 

$188,771,706 
283,680,380 

$30,511,313 
44,566,821 

Increase  over  six  years:    Total  capital,  50%;   gross  earnings,  46%. 

Of  this  increase  about  $31,000,000  was  represented  by  the  sale 
of  $6,000,000  of  5%  two-year  notes  in  1904,  and,  in  1905,  of  $25,- 
000,000  of  new  4%  forty-year  gold  bonds,  covered  by  a  deposit  with 
the  trustees  of  $25,000,000  of  the  capital  stock  of  the  Iron  Moun- 
tain. These  issues  were  for  the  purchase  of  additional  terminal 
properties  and  to  acquire  and  construct  677  miles  of  railway,  mainly 
towards  the  completion  of  the  low  grade  line  from  St.  Louis  to 
New  Orleans. 

The  construction  of  this  line  should  prove  a  great  advantage  to 
the  road,  and  forms  part  of  that  added  competition  which  the  Gulf 
lines  are  showing  towards  the  eastern  trunk  lines  in  securing  grain 
and  other  traffic  from  the  Middle  West. 

Character  of  Traffic. 

The  Missouri  Pacific  does  not  itemize  its  freight  tonnage,  but 
the  report  for  1906  shows  that  the  average  rate  per  ton-mile  was 
slightly  below  the  average  rate  for  the  previous  year.  At  least  a 
part  of  this  may  be  ascribed  to  the  low  grain  rates  to  Gulf  ports 
which  the  Missouri  Pacific  made  in  the  grain  moving  season  of 
1905-6.  This  apparently  did  not  turn  out  to  be  a  satisfactory  move, 
for  the  roads  were  otherwise  well  supplied  with  tonnage,  and  it  is 
possible,  had  these  rates  not  been  made,  the  earnings  for  the  year 
of  1906  would  have  been  higher. 

Stability  of  Earnings. 

Through  a  series  of  years  the  earnings  of  the  system  have 
shown  as  follows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896 

4,938 
4,938 
4,938 
4,938 
4,938 
5,555 
5,613 
5,846 
6,140 
6,204 
6,276 
9& 

$22,011,961 
24,805,451 
26,744,823 
28,079,820 
30,511,313 
36,661,094 
37,495,688 
43,095,769 
43,693,617 
41,067,282 
44,566,821 

$4,457 

1897 

5,023 

1898 

5,417 

1899 

5,281 

1900 

6,179 

1901 

6,600 

1902        

6,680 

1903 

1904 

7,372 
7,116 

1904-5  

6,618 

1905-6 

7,101 

462 


MISSOURI  PACIFIC 


It  will  be  seen  that  in  the  ten  and  a  half  years  under  view,  the 
mileage  has  increased  about  25rr,  while  the  gross  earnings  have 
doubled.  The  earnings  per  mile  have  increased  about  60%.  In  the 
above  table  the  earnings  are  given  both  for  the  calendar  year  of 
1904  and  for  the  fiscal  year  of  1904-5.  the  road's  fiscal  year  having 
been  changed  within  this  period.  It  will  be  seen  that  the  earnings 
for  1904-5  showed  some  decrease  for  the  earnings  for  the  calendar 
year  of  1904,  due  in  part  to  the  decline  in  traffic  from  the  business 
of  the  year  of  the  World's  Fair  at  St.  Louis. 

The  earnings  for  1905-6  showed  a  considerable  increase  over  the 
previous  fiscal  year,  however,  and  this  occurred  with  but  a  very 
slight  increase  in  the  cost  of  conducting  transportation :  a  fact  which 
occasioned  some  unfavorable  comment  and  inquiry  as  to  how  this 
apparently  anomalous  result  could  be  brought  about.  It  will  be  seen 
further  that  the  earnings  per  mile  reached  their  maximum  in  the 
year  of  1903.  so  that  the  extensions  since  that  year  have  tended  to 
reduce  rather  than  raise  the  average  earnings  per  operated  mile. 

It  may  be  noted  further  that  the  earnings  per  mile  on  the  Mis- 
souri Pacific  have  shown  nothing  like  the  increase  which  has  been 
shown,  for  example,  by  the  Atchison,  where  the  mileage  earning? 
practically  doubled  within  the  period  named. 

Maintenance. 

1  ']>  to  the  report  issued  in  1906  no  itemization  had  been  made 
in  the  expense  account  of  the  Missouri  Pacific  system,  but  in  the 
1906  report  these  items  were  shown  both  for  the  year  of  1906  and 
tbc  previous  year.     They  were  as  follows: 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way         ,   Equipment 

1905   

578,823 
668,791 

$782                   $722 
856                     921 

$1,504 

1906 

1,777 

Average.  . .  . 

623,807 

$869                   $821 

$1,690 

Atch.  (2  y.  av. ) 
M.  K.  &  T.   " 
St.L  &  S.F.  " 
Burlington    " 

631,700 
439,300 
426,254 
652,198 

1,424                  1,294 

1,214                     651 

756                     725 

1,148                 1,318 

2,718 
1,865 
1,481 
2,466 

Comparison  for  the  same  two  years  is  introduced  from  com- 
peting lines;  these  show  that  with  less  earnings  per  mile  and  not 
more  than  two-thirds  of  the  traffic  density,  the  total  maintenance 


MISSOURI  PACIFIC  463 

charges  of  the  M.,  K.  &  T.  were  more  than  $200  per  mile  in  excess 
of  those  of  the  Missouri  Pacific.  Again,  with  about  the  same  traffic 
density,  but  considerably  higher  mileage  earnings,  the  total  main- 
tenance charges  on  the  Atchison  were  more  than  one  thousand 
dollars  per  mile  higher  in  these  two  years  than  the  Missouri  Pacific's. 
The  Missouri.  Kansas  &  Texas  has  been  heavily  handicapped  by 
heavy  charges  and  lack  of  capital,  and  its  charges  were  low.  It  is 
anomalous  that  with  30%  less  traffic  density  its  charges  should  still 
have  been  higher  than  the  Missouri  Pacific's. 

A  better  comparison  may  be  made  with  the  Atchison.  Its 
traffic  density  was  about  the  same  as  the  Missouri  Pacific's,  but  its 
mileage  earnings  were  considerably  higher.  Had  the  Missouri  Pa- 
cific expended  the  same  amounts  for  maintenance  as  the  Atchison 
on  an  equal  basis  of  mileage  earnings,  this  would  have  added  nearly 
$500  per  mile  to  the  Missouri  Pacific's  charges,  and  this  on  the 
6,276  miles  of  railroad  would  have  increased  these  charges  by 
about  $3,100,000,  or  about  30%.  The  $6,309,000  of  surplus  shown 
by  the  Missouri  Pacific  system  for  1906  would  have  been  cut  down 
nearly  by  half.  Instead  of  showing  a  surplus  equal  to  8.1%  on 
the  capital  stock,  the  road  would  have  shown  only  about  4%,  or  an 
amount  insufficient  to  meet  the  5%  dividend. 

Improvements. 

Moreover,  while  the  Atchison  has  been  steadily  setting  aside 
crom  its  surplus,  sums  for  improvements,  amounting  in  six 
/ears  to  nearly  $16,000,000.  the  only  sums  set  aside  from  surplus 
by  the  Missouri  Pacific  in  the  same  period  have  been  as  follows : 

1901    $  2,608,657 

1902    2,615,871 

1903    1,249,672 

Total   $  6,474,200 

The  report  for  1906  shows  no  such  sums  devoted  in  the  fiscal 
years  of  1905  or  1906. 

In  1906  Atchison  common  was  put  upon  a  5%  basis,  the  same  as 
the  Missouri  Pacific's  basis.  Tn  estimating  the  value  of  the  two 
stocks  the  investor  therefore  will  take  into  consideration  that  where 
the  Atchison  has  shown  heavy  maintenance  charges  and  large  sums 
for  improvements,  the  Missouri  Pacific  has  shown  maintenance  of 
$1,000  a  year  less,  with  about  the  same  traffic  density,  and  set  aside 


464 


MISSOURI  PACIFIC 


very  small  sums  for  improvements.     It  is  probably  the  same  fact 
which  explains  in  part  why  the  Atchison's  earnings  have  increased 
so  much  more  rapidly  per  mile  than  the  Missouri  Pacific's, 
follows : 

Surplus  Earnings. 

The   surplus   shown    for   each   year   since    1900   has   been   as 


Year 

Surplus 

Per  cent 

Earned  on 

Common 

Dividends 

Paid  on 

Common 

Average 
Price 

1900 

$3,779,020 
7,478,523 
6,544,622 
7,586,493 
5,925,634 
5,432,177 
6,329,014 

4.9 
9.7 
8.4 
9.7 
7.6 
6.9 
8.1 



5 
5 
5 
5 
5 

55 

1901 

96 

1902 

106 

1903 

100 

1904 

1904-5 

1905-6 

99 
95 
96 

In  the  above  table  it  will  be  seen  that  both  the  calendar  year 
for  1904  and  the  fiscal  year  of  1904-5  are  shown. 

While,  on  the  surplus  shown,  the  earnings  of  the  Missouri 
Pacific  have  been  sufficient  comfortably  to  pay  the  5%  dividend 
on  the  stock,  this  showing  has,  as  has  already  been  explained,  been 
reached  by  means  of  maintenance  charges  considerably  below  other 
prosperous  roads  in  much  the  same  territory. 

Dividend  Record. 

In  the  old  days  of  the  Jay  Gould  management,  and  in  the 
flush  years  of  the  eighties,  6%  and  7%  dividends  were  paid,  these 
declining  to  3%  in  1891  and  totally  disappearing  through  eight 
years  up  to  1900.    The  full  dividend  record  has  been  as  follows: 


1880.. 
1881.. 
1882.. 
1883-7 
1888.. 


Per  cent. 


li 
6 

7 
51 


1889-0. 
1891. . . 
1892-00 
1901.. . 
1902-6. 


Per  cent. 


4 
3 

2J 
5 


The  Balance  Sheet. 

The  balance  sheet  of  the  Missouri  Pacific  Railway  at  the  close 
of  the  fiscal  year  of  1906.  not  including  supplies  and  materials  on 
hand,  stood  as  follows: 


MISSOURI  PACIFIC  465 

Current  assets: 

Cash    $4,365,984 

Discount  fund  on  bonds  sold 2,559,166 

Sundry  accounts 4,191,725 

Due  from  St.  L.  I.  M.  Ry  Co 936,300 

Total   $12,053,175 

Current   liabilities 7,145,918 

Leaving"  a  working  balance  of $  4,907,257 

The  balance  sheet  of  the  St.  Louis,  Iron  Mountain  &  Southern 
Railway,  shown  separately,  showed  as  follows : 

Current  assets : 

Discount  fund  on  bonds  sold $  3,200,985 

Land  grant  accounts 5,322,206 

Cash    743,327 

Sundry  accounts 406,181 

Total   $  9,672,699 

Current  liabilities 2,653,524 

Leaving  a  working  balance  of $  7,019,175 

The  amount  to  the  credit  of  profit  and  loss,  itemized  as  Net  In- 
come, was  on  the  Missouri  Pacific  Company,  $6,455,423,  and  on 
the  St.  Louis,  Iron  Mountain  &  Southern,  $7,788,022,  which,  with 
a  small  similar  balance  for  the  Central  Branch  Railway,  make  up  a 
total  credit  to  profit  and  loss  of  $14,527,740  for  the  system. 

Investment  Value. 

The  securities  of  the  Missouri  Pacific  have  undoubtedly  suf- 
fered from  the  incomplete  character  of  the  reports  of  the  road  and 
the  inability  of  the  public  to  gain  any  clear  insight  into  the  opera- 
tions of  the  system.  In  the  report  for  1906  a  very  commendable 
effort  was  made  to  meet  the  present  day  demands  for  publicity  by 
a  full  and  complete  statement  of  the  road's  affairs.  The  full  bonded 
indebtedness  of  the  system  is  shown,  the  items  of  securities  held  is 
illustrated,  and  the  operating  expenses  given  in  detail,  yet  there 
are  sundry  items,  such  as  the  character  of  the  traffic,  the  average 
freight  rate  per  ton  mile,  the  average  number  of  tons  per  car,  the 
average  train  load  and  similar  items,  which  are  not  given,  (hough 

30 


466  MISSOURI  PACIFIC 

some  of  them  may  be  laboriously  computed  from  the  figures  pre- 
sented. 

Added  to  this  previous  lack  of  frankness  has  been  the  recent 
heavy  issue  of  new  securities,  which  always  tends  to  depress  the 
price  of  a  stock,  and  undoubtedly  some  of  the  old-time  prejudices 
against  Gould  securities  still  survive. 

This  prejudice,  at  least  on  any  of  the  old-time  basis,  is  cer- 
tainly undeserved.  The  present  Gould  policy  is  one  of  steady  up- 
building and  conservative  growth.  It  could  have  been  in  large  part 
removed  by  greater  frankness  towards  the  public,  and  the  step 
which  has  been  taken  in  the  reports  for  1906  has  gone  far  to 
dissipate  it. 

On  the  other  hand,  it  is  evident  that  the  Missouri  Pacific  has 
not  been  handled  with  the  same  energy,  nor  with  such  satisfactory 
results,  as,  for  example,  a  road  like  the  Atchison.  It  is  true  that 
the  latter  is  a  through  road,  having  its  own  line  to  the  Pacific,  and 
when  the  Western  Pacific  division  of  the  Gould  system  is  com- 
pleted a  large  extension  of  business  may  ensue.  But  the  mileage  of 
the  Gould  lines  is  already  one  of  the  most  extensive  in  the  Union, 
and  with  the  purchase  of  the  Western  Maryland,  already  covers 
three-quarters  of  the  distance  from  the  Atlantic  to  the  Pacific. 
With  such  enormous  freight  gathering  facilities  it  is  not  entirely 
clear  why  the  Missouri  Pacific  should  not  have  enjoyed  the  same 
degree  of  prosperity  as  the  Atchison,  the  Union  Pacific  and  similar 
lines. 

It  is  clear  from  the  preceding  analysis  that  the  net  capitalization 
of  the  Missouri  Pacific  system,  even  with  the  addition  of  new  roads, 
is  still  far  below  that  of  most  of  its  competitors,  yet  on  a  5%  basis, 
even  in  the  tremendous  year  of  1906,  with  solid  railway  securities 
selling  in  general  on  about  a  3y2%  basis,  the  stock  of  the  road  rose 
above  par  only  for  a  short  period,  and  in  the  very  moderate  decline 
in  the  spring,  declined  to  $85  per  share.  In  the  huge  rise  of  prices 
in  1902  the  stock  was  carried  to  $125,  and  even  in  the  prolonged 
slump  of  1903-4  it  declined  only  to  $85.  At  the  same  time  the 
stock  of  the  Atchison  went  as  low  as  $54,  and  of  the  Union  Pacific 
as  low  as  $65.  In  1906  Atchison  rose  to  $110,  and  the  Union  Pa- 
cific, though  by  methods  which  excited  much  criticism,  was  put  up 
to  $195.  At  the  same  time  the  highest  point  touched  by  Missouri 
Pacific  was  $106,  in  the  great  rise  of  January  in  the  same  year. 

The  suspicion  and  distrust  inevitably  suggested  by  secrecy  have 
no  longer  a  basis,  and  the  Missouri  Pacific  may  now  be  judged  on 
its  merits,  along  with  other  roads.     After  meeting  unusually  heavy 


MISSOURI  PACIFIC  467 

maintenance  charges,  caused  in  part  by  floods  and  washouts,  Atchi- 
son was  able  to  show  about  9%  of  surplus  on  its  common  stock, 
over  and  above  the  preferred  dividends  for  the  five  years  from 
1902.  In  the  same  period  the  Missouri  Pacific  showed  an  average 
surplus  of  8%  on  its  capital  stock ;  but  had  the  maintenance  charges 
been  on  the  Atchison  basis,  the  earnings  per  mile,  compared,  this 
'nominal  surplus  would  have  been  very  considerably  reduced,  prob- 
ably to  an  average  of  not  more  than  5%. 

In  other  words,  had  the  Missouri  Pacific's  maintenance  been 
equally  as  liberal  as  the  Atchison's,  earnings  compared,  the  Atchi- 
son could  have  paid  a  6%  dividend  and  shown  a  rather  larger  per- 
centage of  net  surplus  after  dividends  than  could  the  Missouri 
Pacific  after  paying  4%  dividends.  In  1906  the  net  surplus,  after 
dividends  shown  by  the  Atchison  of  5%  on  both  the  common  and  the 
preferred,  was  equivalent  to  6.8%  on  the  common  stock,  while  the 
surplus  shown  by  the  Missouri  Pacific,  after  a  5%  dividend,  was 
equivalent  to  3.1%  on  the  common  stock;  and  this  surplus  would 
have  been  practically  wiped  out  with  maintenance  charges  on  a  scale 
similar  to  the  Atchison's. 

The  year  of  1906  and  the  immediately  preceding  years  have 
been  for  the  Southwest,  years  of  unexampled  prosperity,  amounting 
in  many  sections  to  a  tremendous  boom.  Irt  times  past  booms  have 
been  invariably  succeeded  by  years  of  depression.  Should  such  a 
depression  come,  it  is  evident  from  the  foregoing  that  where  the 
Atchison  should  be  able  comfortably  to  maintain  its  5%  dividends, 
it  is  more  likely  that  the  dividend  of  the  Missouri  Pacific  would 
have  to  be  reduced,  for  the  Atchison  has  a  wide  margin  of  heavy 
maintenance  charges  which  could  be  scaled  in  case  of  necessity, 
while  the  Missouri  Pacific  has  not. 

Over  against  this  is  to  be  set,  first,  the  extension  of  the  Gould 
system  westward  to  the  Pacific,  and,  second,  the  completion  of  the 
low  grade  line  from  St.  Louis  to  New  Orleans,  and  the  very  con- 
siderable increase  of  business  which  should  be  derived  from  these 
two  sources.  The  Missouri  Pacific  has  been  upon  a  5%  basis  now 
for  five  years,  and,  as  a  matter  of  policy  as  well  as  of  pride,  every 
effort  should  be  made  to  maintain  this  basis  even  in  less  prosperous 
times,  and  should  the  new  lines  produce  the  business  that  is  ex- 
pected of  them,  this  undoubtedly  could  be  done.  In  1Q06  the  system 
carried  to  the  credit  of  profit  and  loss,  over  and  above  its  dividend, 
$2,438,000.  Of  this,  about  $600,000  was  a  distribution  of  the  surplus 
of  the  Central  Branch  Lines  over  and  above  its  net  earnings  for 
the  year,  leaving  a  net  surplus  over  this  special  dividend  of  abom 


468  MISSOURI  PACIFIC 

$1,800,000.     The  road  was  in  excellent  condition  as  to  working 
capital,  and  its  total  profit  and  loss  balance  was  high. 

From  all  this  the  investor  is  likely  to  conclude  that  Missouri 
Pacific  may  be  held  to  a  5%  basis  unless  a  prolonged  period  of 
depression  ensues.  But  he  will  probably  conclude  also  that  the  mar- 
gin for  this  dividend  is  none  too  wide,  and  that  it  does  not  present 
the  same  degree  of  security  as  many  other  5%  stocks. 

For  these  reasons  it  seems  doubtful,  should  high  rates  for 
money  such  as  obtained  in  1906  continue,  that  Missouri  Pacific  would 
sell  very  much  above  par,  and  on  a  general  slump  in  the  market  it 
might  sell  considerably  below.  If  the  stock  could  sell  down  to  $85 
per  share  on  so  slight  a  general  recession  as  that  of  1906,  it  should 
sell  somewhat  lower  on  a  more  general  decline.  At  $83  per  share 
the  stock  would  yield  6%.  Purchased  at  something  like  these  figures 
or  better,  it  would  yield  a  rate  of  interest  commensurate  with  the 
risk  involved,  with  a  large  probability  that  the  earnings  of  the  road 
will  be  maintained  or  increased  from  its  added  sources  of  business, 
even  in  less  prosperous  years.  The  speculative  investor,  gambling 
for  a  rise  rather  than  considering  safe  investments,  will  consider 
the  fact  that  Gould  securities  do  not  enjoy  the  same  degree  of  public 
favor  as  many  others;  and  likewise  that  this  prejudice  against  them 
is  likely  to  disappear  with  the  more  ready  access  to  the  operations  of 
the  company  which  is  now  obtainable. 


MOBILE  AND  OHIO  RAILROAD. 

Though  operated  separately,  nearly  all  the  stock  of  the  Mobile 
&  Ohio  is  owned  by  the  Southern  Railway,  and  it  is,  to  all  intents, 
a  part  of  the  Southern  Railway  system.  The  line  extends  from 
St.  Louis  to  Mobile,  and  in  1906  it  operated  926  miles.  The  gross 
earnings  for  1906  were  $9,445,927,  or  $10,200  per  mile. 

Appropriations  for  equipment  for  1906  were  $1,417  per  mile 
for  way  and  $1,236  for  equipment,  a  total  of  $2,653.  The  propor- 
tion of  income  expended  for  maintenance  has  not  varied  greatly  in  a 
number  of  years.  The  freight  traffic  density  for  1906  was  1,204,011 
ton  miles,  and  on  a  line  of  this  character  it  may  be  assumed  that 
the  maintenance  has  been  entirely  adequate. 

On  the  basis  of  this  maintenance,  the  company  showed  a  total 
net  income  of  $3,204,991,  the  fixed  charges  consuming  62%  of 
this,  leaving  an  ample  margin  of  safety  for  the  interest  on  the 
underlying  securities.  There  remained  a  surplus  of  $1,209,818, 
equivalent  to  20%  on  the  outstanding  capital  stock  of  $6,070,600. 
The  dividend  for  the  calendar  year  of  1905  was  6%,  and  for  the 
calendar  year  of  1906  it  was  5j/2%.  It  is  evident  from  this  that 
the  Southern  Railway  has  an  equity  of  some  value  in  the  undis- 
tributed surplus.  If  the  surplus  shown  were  evenly  divided  between 
dividends  and  improvements,  this  equity  was  in  the  neighborhood  of 
$250,000  for  the  year  of  1906. 

As  of  June  30th,  1906,  the  Southern  Railway  owned  $5,670,- 
200  of  the  $6,070,600  stock  outstanding,  and  likewise  $8,035,000  of 
the  $9,472,000  general  mortgage  4%  bonds.  The  purchase  of  the 
latter  securities  was  made  owing  to  the  fact  that  voting  power  on 
$4,  984,200  of  the  stock  is  exercised  by  the  general  mortgage  bond 
holders,  by  virtue  of  the  deposit  in  trust  under  the  general  mortgage 
of  the  old  debentures  of  1879. 

In  1906  the  Mobile  &  Ohio  owned  practically  all  of  the  stock 
of  the  St.  Louis  &  Cairo  Railroad,  issuing  therefor  $2,500,000  of 
collateral  4%  bonds.  The  St.  Louis  &  Cairo — 159  miles — is  leased 
by  the  Mobile  &  Ohio. 

(469) 


NASHVILLE,  CHATTANOOGA   AND   ST.  LOUIS 

RAILWAY. 

The  Nashville,  Chattanooga  &  St.  Louis  is  a  subsidiary  of  the 
Louisville  &  Nashville,  although  separately  operated.  Of  its  $10,- 
000,000  outstanding  slock  $7,177,600,  or  71%,  is  owned  by  the 
Louisville  &  Nashville.  In  1906  it  operated  1,226  miles,  including 
the  Paducah  &  Memphis,  leased  from  the  Louisville  &  Nashville; 
its  mileage  has  changed  very  little  in  several  years.  On  earnings  of 
$9,071  per  mile  it  is  capitalized  for  a  total  of  $21,222  per  mile,  not 
capitalizing  the  $624,862  paid  in   rentals. 

The  fixed  charges,  including  rentals,  consumed  only  45%  of  the 
total  net  income  for  1(K)6.  For  a  number  of  years  the  maintenance 
charges  have  been  very  heavily  loaded  for  improvements  and  addi- 
tions, the  excess  maintenance  ranging  from  $700  to  $1,000  per 
mile  per  annum.  In  1906  a  separate  item  was  made  of  these  im- 
provements, with  the  result  that  the  surplus  earned  showed  a  large 
increase  to  a  total  of  $2,243,413.  Of  this  amount  $1,289,421  was 
turned  back  into  the  road  for  permanent  improvements. 

The  surplus  shown  before  the  deduction  noted  was  equivalent 
to  22^v  on  the  capital  stock  of  the  road,  and  this  represents  some- 
where near  the  normal,  actual,  annual  earnings.  Beginning  with 
1904,  Ar/(  was  paid  on  the  stock,  this  rate  being  raised  to  5%  in 
1905  and  6%  in  1907.  Earning  around  20^  per  year,  and  dividing 
this  equally  between  dividends  and  improvements,  the  road  is  per- 
fectly able  to  pay  an  annual  10%  dividend,  so  that  the  Louisville 
&  Nashville's  equity  in  the  undisturbed  earnings  was  certainly 
equal  to  4%  on  its  holdings,  or  around  $300,000  at  the  inside. 

Belonging  to  so  rich  and  so  well  managed  a  system  as  that  of 
the  Louisville  &  Nashville,  and  traversing  a  fine  section  of  the  coun- 
try, the  stock  is  probably  as  solid  as  any  to  be  found  anywhere.  It 
may  be  assumed  that  with  the  results  beginning  to  show  from  the 
heavy  sums  set  aside  from  earnings  for  improvements,  the  dividend 
will  be  raised  to  a  7%  or  8%  basis,  if  not  higher,  should  there  be  no 
heavy  recession  in  business.  The  stock  should  be  well  worth  that  of 
the  parent  road,  or  at  least  from  $120  to  $150  per  share,  according 
to  prevailing  money  rates. 

(470) 


NEW  YORK   CENTRAL  AND  HUDSON    RIVER 

RAILROAD. 

The  New  York  Central  &  Hudson  River  Railroad  divides  with 
the  Pennsylvania  the  distinction  of  being  the  most  important  rail- 
road in  the  United  States,  although  in  point  of  gross  earnings  it 
comes  after  both  the  Pennsylvania  and  the  Southern  Pacific.  It  is 
the  chief  property  of  an  interest  controlling  a  larger  mileage  than 
any  other  system  in  this  country,  or,  for  that  matter,  in  the  world. 
It  is  the  principal  railway  leading  out  of  New  York  City,  and  it 
covers  an  important  line  of  towns  and  cities  the  entire  length  of  its 
route.  It  has,  moreover,  the  only  "water  grade"  between  the  sea- 
board, the  Great  Lakes  and  Chicago.  Nevertheless,  its  tonnage, 
earnings  and  profits  are  considerably  below  those  of  its  chief  rival, 
the  Pennsylvania.  A  comparison  of  the  chief  features  of  the  two 
companies  will  be  found  under  the  analysis  of  the  Pennsylvania 
road. 

History. 

The  road  represents  the  consolidation  in  1869  of  the  Hudson 
River  Railroad  and  the  New  York  Central.  The  latter  in  its  turn 
was  the  union  of  four  small  lines,  extending  from  Albany  to  Buffalo. 
It  is  of  some  interest  to  note  that  this  consolidation  at  the  time 
aroused  great  opposition;  also  that  the  average  time  consumed  in 
the  journey  from  Albany  to  Buffalo  before  the  consolidation  was 
thirty  hours.  The  fast  express  trains  now  cover  the  entire  distance 
from  New  York  to  Buffalo  in  eight  hours. 

Since  the  original  consolidation,  the  Central  has  also  acquired 
the  New  York  &  Harlem  line,  the  West  Shore,  and  several  sub- 
sidiary roads.  It  operates  the  Boston  &  Albany  under  lease,  and 
owns  the  larger  part  of  the  stocks  of  the  Lake  Shore  &  Michigan 
Southern  and  the  Michigan  Central  railroads.  Through  these  it 
directly  controls  a  total  of  over  12,000  miles  of  operated  road. 

Ownership. 

The  control  of  the  New  York  Central  was  purchased  by  Com- 
modore Vanderbilt  in  1851,  and  the  consolidation  with  the  Hudson 

C471) 


472        NEW  YORK  CENTRAL  &  HUDSON  RIVER 

River  Railroad  and  other  roads  was  carried  out  by  him.  The  sys 
tern  has  ever  since  been  the  proprietary  interest  of  this  family. 
Within  the  last  few  years  the  Standard  Oil  interest  has  also  become 
prominent  in  the  directorate,  and  its  holdings  are  said  to  be  heavy. 
In  1906  the  Vanderbilt  interests  were  represented  in  the  directorate 
by  William  K.  and  Frederick  W.  Vanderbilt,  Chauncey  M.  Depew 
(chairman),  William  H.  Newman(  president),  H.  McK.  Twombly, 
Samuel  F.  Barger  and  Charles  C.  Clarke  (former  first  vice-presi- 
dent). The  Standard  Oil  interests  were  represented  directly  by 
William  Rockefeller  and  James  Stillman  (president  of  the  National 
City  Bank),  the  First  National  Bank,  by  its  president,  George  F. 
Baker,  and  by  J.  Pierpont  Morgan,  a  director.  The  other  directors 
were  D.  O.  Mills  (capitalist)  and  George  S.  Bowdoin. 

The  New  York  Central  is  the  fourth  most  widely  held  railway 
stock  of  the  country ;  the  number  of  shareholders  reported  for  1905 
was  11,782  against  about  44,000  fo  the  Pennsylvania. 

Affiliations. 

It  will  be  observed  that  no  representatives  of  other  lines  are 
included  in  the  Central's  directorate,  with  the  possible  exception  of 
Mr.  Morgan.  The  latter  is  generally  regarded  as  the  dominating 
influence  in  the  Erie  Railroad,  which  is  the  Central's  most  direct 
competitor.  The  Central  leases  or  controls  directly,  or  through 
subsidiary  companies,  the  following  lines: 

Boston  &  Albany, 

Lake  Shore  &  Michigan  Southern. 

Michigan  Central  (and  Canada  Southern), 

New  York,  Chicago  &  St.  Louis  (Nickel  Plate), 

Cleveland,  Cincinnati,  Chicago  &  St.  Louis   (Big  Four), 

Peoria  &  Eastern, 

Pittsburg  &  Lake  Erie, 

Lake  Erie  &  Western, 

Chicago,  Indiana  &  Southern. 

Toronto,  Hamilton  &  Buffalo, 

Rutland, 

and  a  number  of  smaller  lines. 

In  addition  to  these,  the  New  York  Central  owns  through  the 
Lake  Shore,  one-half  of  a  block  of  $60,000,000  out  of  a  total  of 
$140,000,000  of  Reading  stock,  or  sufficient  to  insure  a  working 
control  of  the  latter.     The  other  half  is  owned  by  the  Baltimore  & 


NEW  YORK  CENTRAL  &  HUDSON  RIVER        473 

Ohio,  and  the  B.  &  O.  in  its  turn  is  controlled  by  the  Pennsylvania 
and  Union  Pacific.  The  Reading,  again,  controls  the  Central  of  New 
Jersey.  Through  the  Lake  Shore,  the  New  York  Central  has  large 
interests  in  the  Lehigh  Valley,  and  is  directly  represented  in  the 
directorate  of  that  road  by  H.  McK.  Twombly  and  George  F.  Baker. 
Messrs.  Baker,  Twombly,  F.  W.  Vanderbilt,  William  Rockefeller 
and  James  Stillman,  all  in  the  New  York  Central  directorate,  are 
also  members  of  the  Board  of  Managers  of  the  Delaware  &  Lacka- 
wanna. Messrs.  Twombly,  D.  O.  Mills  and  George  F.  Baker  are 
included  in  the  Erie  directorate.  On  the  board  of  the  Delaware 
&  Hudson,  and  again  of  the  New  York,  Ontario  &  Western,  is 
Chauncey  M.  Depew.  Messrs.  Twombly,  Rockefeller  and  Morgan 
are  on  the  board  of  the  Xew  York,  New  Haven  &  Hartford,  and  the 
New  York,  Susquehanna  &  Western  is  owned  by  the  Erie,  so  that 
there  is  no  line  in  New  York  State,  or  running  out  of  New  York 
City,  in  which  representatives  of  the  New  York  Central  are  not 
included.  This  is  part  of  the  "community  of  interest"  idea  which 
has  so  effectively  disposed  of  the  disastrous  rate  wars  of  former 
days. 

The  present  active  head  of  the  New  York  Central  road  is 
William  K.  Vanderbilt,  who  succeeded  to  that  position  on  the  death 
of  his  brother,  Cornelius  Vanderbilt  II.  Through  him  the  latter  day 
Vanderbilt  policy  has  been  rather  accentuated,  and  its  extreme  con- 
servatism has  met  with  some  unfavorable  criticism  in  failing  to 
meet  the  very  aggressive  tactics  of  the  Cassatt  regime  in  the  Penn 
sylvania  Railroad.  At  the  present  time,  however,  the  Central  is 
carrying  out  a  vast  scheme  of  improvements  which  will  undoubtedly 
maintain  for  it  its  traditional  position. 

Capitalization. 

The  New  York  Central  actually  owns  only  806  miles  of  road ; 
it  leases  2,620  miles,  and  the  balance  of  the  total  of  3,784  miles  is 
operated  under  contract  or  under  trackage  rights.  In  1906  it  paid  as 
rentals  of  leased  lines,  mainly  in  the  form  of  interest  and  dividends 
on  guaranteed  stocks  and  bonds,  $9,501,170,  as  against  $8,214,519 
interest  on  its  own  funded  debt.  Capitalizing  rentals  on  a  4% 
basis,  this  yields  the  sum  of  $237,529,250 — a  figure  which  is 
probably  under  the  actual  market  value  of  the  securities  of  the 
underlying  roads.  Adding  this  amount  to  the  nominal  capital  shown, 
the  capitalization  of  the  road  January  1st,  1907,  stood  as  follows: 


474        NEW  YORK  CENTRAL  &  HUDSON  RIVER 

Common    stock $178,182,700 

Funded  debt 230,564,845 

Total   capital $408,747,545 

Rentals,  capitalized  at  4% 237,529,250 

Approximate  gross   capitalization.  .  .$646,276,795 
Securities  held 180,129,254 

Approximate    net    capitalization.  .  .  .$466,147,541 

Approximate  net  capitalization  per  mile.  $123,188 

Average   miles   operated 3,784 

Xet  earnings  on  net  capital 5.8% 

Stock  on  net  capitalization 38% 

Fixed  charges  on  total  net  income 64% 

Factor  of   Safety 36% 

Style  of  Capitalization. 

Nominally,  the  funded  debt  of  the  road  is  small — excluding  the 
collateral  bonds  issued  in  exchange  for  the  Lake  Shore  and  the 
Michigan  Central  stocks,  about  $120,000,000.  If,  pursuant  to  the 
policy  of  this  book,  we  capitalize  rentals  paid  at  the  rate  of  4%,  this 
adds  $237,500,000  of  liabilities,  giving  a  total  of  $347,500,000.  This 
stands  against  $178,000,000  of  outstanding  stock  at  the  close  of  1906. 
Securities  and  advances  deducted,  the  stock  therefore  represents  38% 
of  the  estimated  net  capitalization,  as  against  50%  for  the  New 
Haven  and  53%  for  the  Pennsylvania.  The  total  net  income  for 
1906  was  $34,843,810;  fixed  charges,  including  rentals  and  taxes, 
$22,267,904.  Fixed  charges  consumed,  therefore,  64%  of  the  total 
available  income.  This  is  against  38%  for  the  Pennsylvania,  38'  ■ 
for  the  Delaware  &  Lackawanna,  38%  for  the  Lake  Shore,  and  56% 
for  the  New  York  and  New  Haven. 

This  would  mean  that  the  total  income  of  the  Central  could 
decline  approximately  36%  before  payments  of  its  bonds,  leases  and 
guarantees  became  impaired.  So,  in  a  broad  way,  it  may  be  sai-1 
that  these  securities  have  a  "factor  of  safety"  of  at  least  36%.  This 
compares  with  a  similar  estimate  of  a  ''factor  of  safety"  on  Penn- 
sylvania securities  of  over  60%.  and  the  same  figure  for  the  Lacka- 
wanna and  Lake  Shore. 

The  net  earnings  for  1906.  including  $1,308,760  charged  to 
earnings  for  extraordinary  improvements,  represented  5.8%  on  the 


NEW  YORK  CENTRAL  &  HUDSON  RIVER        475 

$466,000,000  here  estimated  as  the  approximate  net  capitalization 
of  the  road.  This  percentage  compares  with  a  similar  estimate  of 
8.1$  for  the  Pennsylvania,  8.8%  for  the  New  Haven,  13.7%  for 
the  Lackawanna,  about  10%  (estimated)  for  the  Michigan  Cen- 
tral and  12.7%  for  the  Lake  Shore.  It  will  be  seen,  therefore,  that 
the  New  York  Central  is  very  highly  capitalized,  in  comparison  with 
the  roads  named.    The  general  average  for  the  country  is  6%. 

Equities    Owned. 

In  1906  the  dividends  on  the  Lake  Shore  were  increased  to 
12%,  and  the  Michigan  Central's  to  6%,  so  that  the  yield  to  the 
New  York  Central  represents  a  handsome  surplus  over  the  interest 
paid  on  the  bonds  issued  for  the  stock.  In  1907  this  excess  of  return 
aggregates  $3,700,000.  As  a  matter  of  fact,  the  New  York  Central's 
equity  in  these  roads  is  considerably  greater  than  this,  since  the 
operating  expenses  of  these  two  lines  have  been  systematically  sur- 
charged through  a  series  of  years,  and  the  dividend  returns  on 
either  of  them  might  be  further  increased  without  in  any  way 
crippling  the  roads.  All  told,  the  New  York  Central  might  derive 
a  surplus  other  than  income  from  these  sources  of  $5,000,000  or 
more,  or  about  3.7%  on  the  outstanding  stock  as  of  January,  1907. 

Increase  of  Capitalization. 

The  following  shows  the  increase  of  nominal  capital  and  earn- 
ings from  1900  to  the  close  of  1906: 


Common  Funded  Gross 

Year  Stock  Debt  Total  Earnings 


1900 $115,000,000       $185,751,021        $300,751,021        $54,562,952 

1906 178,182,700         230,564,845         408,746,545         92,089,768 

! I I I 

Increase  over  six  and  a  half  years:    Nominal  capital,  36%;  gross  earnings, 

70%. 

In  other  words,  the  earnings  increased  twice  as  fast  as  did  the 
capital  employed.  Yet  this  increase  was  not  used  to  swell  dividends, 
but  put  back  into  the  road  in  heavier  maintenance  and  improve- 
ments. 

Character  of  Traffic. 

The  Central's  reports  show  that  the  character  of  its  traffic  is  well 
distributed,  so  that  it  is  not  vitally  affected  by  depression  in  any 
especial  industry.  Its  passenger  traffic  is  heavy  and  yields  30%  of 
the  gross  income.    In  its  freight  traffic  the  largest  single  item  is  coal 


476        NEW  YORK  CENTRAL  &  HUDSON  RIVER 


and  coke  {37%)  ;  farm  products  comprise  20%;  manufactures  and 
other  tonnage  the  balance. 

Stability  of  Earnings. 

Since  1896  the  Central's  mileage  lias  increased  nearly  1,400 
miles,  or  58%,  while  gross  earnings  have  more  than  doubled.  The 
earnings  have  shown  great  stability,  increasing  very  steadily,  as  the 
following  table  reveals : 


Year 

1896-7 

1897-8 

1898-9 

1899-0 

1900-1 

1901-2 

1902-3 

1903-4 

1905 

1906 


Average 
Miles  Operated 


Gross  Earnings 


Earnings 
per  Mile 


,395 
,395 
,395 
,817 
,223 
,320 
,424 
,490 
,774 
,784 


$43,614,405 
45,774,240 
46,184,657 
54,562,951 
66,333,111 
70,903,868 
70,605,778 
77,682,221 
86,095,602 
92,089,768 


$18,210 
19,112 
19,285 
19,369 
20,581 
21,356 
20,626 
22,258 
22,547 
24,336 


Traffic  Density  and  Maintenance. 


Since  1900  traffic  density  and  maintenance  charge 
pared  as  follows : 


s  have  com- 


Year 

Freight  Traffic 
Density  (Ton  miles 
per  mile  of  road) 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

2,049,919 

$2,426 

$2,430 

$4,856 

1900-2 

1,929,995 

2,590 

2,792 

5,382 

1900-3 

2,152,138 

3,059 

3,180 

6,239 

1900-4 

1,988,206 

2,891 

3,255 

6,146 

1905 

2,231,435 

2,648 

3,508 

6,156 

1906 

2,226,046 

2,832 

3,850 

6,682 

Average.  . 

2,096,289 

82,741 

$3,169 

85,910 

Miles  of  extra  main  track,  2,037. 

Penn I            4,130,690  ~3J52 

Erie 2,434,819  1,861 

Lackawanna            3,079,629  4,754 

Leh.  Val 2,771,846  2,588 


5,232 
3,216 
3,579 
3,429 


8,984 
5,077 
8,333 
6,017 


On  an  increase  in  traffic  of  about  10%  in  six  and  a  half  years, 
maintenance  increased  38%.  But  even  this  liberal  maintenance  does 
not  adequately  represent  the  solid  policy  of  the  road.  Systematically 
through  a  series  of  years,  considerable  sums  have  annually  been 
set  aside  from  surplus  earnings  for  special  improvements,  new 
equipment,  etc.,  as  follows : 


NEW  YORK  CENTRAL  &  HUDSON  RIVER        477 

1899-0  $  2,000,000 

1900-1  1,500,000 

1901-2  1,750,000 

1902-3  1,750,000 

1903-4  2,207,000 

1905  3,032,000 

1906 4,108,260 


Total   $16,347,260 

This  on  3,700  miles  or  more,  average  length  of  road,  does  not 
compare  with  the  $22,456,624  set  aside  by  the  Lackawanna  on  less 
than  800  miles  in  six  years,  nor  with  the  $63,652,929  devoted  to  the 
same  purpose  by  the  Pennsylvania  since  1900. 

Surplus  Earnings. 

It  is  evident  enough  from  the  following  table  that  surplus  has 
been  pretty  carefully  adjusted  to  meet  dividend  requirements,  the 
balance,  as  the  preceding  figures  show,  having  gone  back  into  im- 
provement of  the  road.  In  the  amounts  shown  below  is  included, 
however,  sums  charged  to  operating  expenses  for  "extraordinary 
expenditures,"  and  is  the  surplus  shown  before  deducting  the  items 
given  in  the  table  preceding: 


Year 

Surplus 

Per  cent. 

Earned  on 

Common 

Dividends 
Paid  on 
Common 

Average 
Price 

1900-1 

$7,742,183 

8,016,718 

8,724,304 

9,107,757 

10,258,569 

12,275,906 

6.7                    5 

141 

1901-2 

6.7 
6.5 
6.8 

7.7 
8. 

5 
5 
5 
5 
51 

160 

1902-3 

159 

1904 

129 

1905 

154 

1906 

139 

Average 

7.06 

5% 

147 

Dividend  Record. 

The  financial  history  of  the  Central  is  reflected  in  its  dividend 
record,  and  that  record  is  an  enviable  one.  In  the  36  years  of  its 
existence  as  a  consolidated  road  (and  for  many  years  previously  as 
separate  lines)  it  has  never  defaulted  a  bond,  and  it  has  never 
passed  a  year  without  a  dividend.  This  period  covers  two  of  the 
severest  depressions  that  the  United  States  has  known,  viz.,  1873-7, 
and  1893-97 — evidence  that  railroads  in  no  wise  differ  from  any 
other  business,  and  that  careful  and  intelligent  management  meets 


478        NEW  YORK  CENTRAL  &  HUDSON  RIVER 

with  the  same  reward  here  as  elsewhere.     The  following  is  the  full 
record  of  the  consolidated  road : 

Year.  Dividends  Paid. 

% 
1869-84  8 

1885      zy2 

1886-89  4 

1890-91  Ay2 

1892  5% 

1893-94  5 

1895  4J4 

1896-99  4 

1900-05  5 

1906  SH 

In  December,  1906,  the  stock  was  put  on  a  6%  basis. 

The  Balance  Sheet. 

As  of  December  31st,  1906,  the  balance  sheet  showed  : 

Current  assets $37,765,111 

Current   liabilities 18,894,077 

Leaving  a  working  balance  of $18,871,034 

Asset  items  in  suspense  exceeded  liabilities  to  lessor  companies 
by  about  $1,400,000. 

The  amount  of  cash  on  hand  was  $6,993,638  and  the  balance  to 
credit  of  profit  and  loss,  $14,631,553. 

Investment  Value. 

In  1''00  the  New  York  Central  was  restored  to  a  5%  dividend 
basis  after  an  interval  of  six  years.  It  so  remained  until  late  in  1906, 
when,  following  the  Union  Pacific,  the  Pennsylvania  and  other  lines, 
the  dividend  was  increased  to  6%.  At  the  same  time  the  dividends 
on  the  Lake  Shore  were  increased  from  8$  to  12%,  and  on  the 
Michigan  Central  from  4','  to  6%.  Both  of  these  latter  increases 
were  amply  justified  and  resulted  in  an  addition  of  $754,820  in  the 
other  income  of  the  New  York  Central  for  1906.  For  the  full  year 
the  increase  would  have  been  equal  to  about  $2,150,000,  or  equiva- 
lent to  considerably  more  than  ]%  on  the  entire  amount  of  New 
York  Central  stock  outstanding  at  the  close  of  1906.  In  other 
words,  the  Central  simply  drew  from  its  equities  in  the  earnings  of 
these  two  subsidiary  roads  sufficient  to  increase  its  dividend  by  1'; 


NEW  YORK  CENTRAL  &  HUDSON  RIVER        479 

Previous  to  this  the  income  derived  from  the  Central's  ownership  of 
these  two  roads  was  but  little  more  than  sufficient  to  pay  the  in- 
terest on  the  bonds  issued  in  purchase  of  the  two  roads. 

Compared  with  the  Pennsylvania,  however,  it  will  be  seen  that 
the  surplus  remaining  after  dividend  payments  on  the  Central  has 
generally  been  small,  and  the  part  of  the  surplus  devoted  to  improve- 
ments nothing  like  the  Pennsylvania's  tradition  of  a  dollar-for- 
dividends,  a  dollar- for-improvements.  A  careful  examination  of  the 
reports  indicates  that  the  maintenance  standard  of  the  Pennsylvania 
is,  if  anything,  higher  than  that  of  the  New  York  Central.  For 
example,  in  repairs  of  its  locomotives  in  1906  the  Pennsylvania 
spenl  9.4  cents  per  engine  per  mile,  as  against  9  cents  on  the  Cen- 
tral, while  the  Pennsylvania  spent  in  repairs  apparently  about  1.07 
cents  per  freight  car  mile,  as  against  about  .70  cents  on  the  Central. 
The  higher  earnings  shown  by  the  Pennsylvania,  therefore,  are  not 
merely  a  matter  of  bookkeeping. 

By  comparison  of  the  Central's  range  of  price  with  that  of 
its  chief  competitor,  it  will  be  seen  that  on  a  5%  basis  it  has  sold 
in  general  at  about  the  same  level  and  in  1906  rather  higher  than 
the  Pennsylvania  on  a  basis  of  6%.  The  reason  for  this  is  not  very 
c'ear.  The  New  York  Central  has  very  large  equities  in  its  sub- 
sidiary lines,  but  so  has  the  Pennsylvania.  It  can  be  shown  that  the 
Lake  Shore  in  1906  earned  around  23%  ;  but  the  Pennsylvania  Com- 
pany (operating  the  lines  West)  earned  nearly  15%,  and  while  the 
Lake  Shore  was  put  upon  a  12%  basis  in  order  to  provide  for  the 
Central's  increased  dividend,  the  Pennsylvania  Company's  dividend 
was  raised  only  from  5%  to  6%.  The  Pennsylvania's  undistributed 
equities  of  1907  should  exceed  those  of  the  New  York  Central. 

On  as  solid  a  basis  of  maintenance  charges,  the  Pennsylvania 
showed  about  50%  higher  surplus  for  its  stock  than  the  New  York 
Central,  and  its  dividend  rate  was  16%  higher.  It  is  true  that  the 
New  York  Central's  earnings  rest  upon  a  broader  and  perhaps 
firmer  basis ;  one-half  of  the  Pennsylvania's  enormous  tonnage  is 
coal  and  coke.  This  probably  gives  a  larger  sense  of  security  to  New 
York  Central  stock  in  the  face  of  the  fact  that  its  showing  of  earn- 
ings is  generally  smaller.  Then,  too,  there  is  undoubtedly  a  little 
sentiment ;  rich  men  like  to  hold  New  York  Central  stock :  and  they 
and  others  are  apparently  willing  to  average  about  20%  less  from 
their  holdings  than  if  they  were  in  Pennsylvania  or  in  many  other 
standard  roads. 

In  June  of  1907.  six  months  after  the  dividend  was  raised  to 
6%,   Ww    York  Central  sold  at  $10Rj4  Per  share,  the  lowest  since 


480        NEW  YORK  CENTRAL  &  HUDSON  RIVER 

1898.  In  November  of  1901,  on  a  5%  basis,  it  sold  at  $174  per 
share.  The  high  point  of  1902  was  $168,  the  low  of  1903,  $112,  and 
the  high  of  1906,  $167.  These  are  wide  fluctuations  in  a  stock  of 
the  Central's  character,  and  presented  large  opportunities  for  profit 
to  the  investor  who  bought  it  at  the  low  levels  and  sold  it  at  the  high. 

The  low  price  of  1907  was  especially  occasioned  by  a  bad  show- 
ing for  the  spring  quarter,  and  by  the  difficulty  which  the  Central, 
like  other  roads,  found  in  raising  new  capital  to  carry  on  its  im- 
provements. Unless  unfavorable  conditions  should  continue,  it  is 
not  improbable  that,  roughly  speaking,  these  prices,  $108-$174,  might 
represent  somewhere  near  the  outside  limits  of  fluctuation  for 
several  years  to  come.  It  is  hardly  likely  that  the  marked  increase 
in  the  earning  power  of  invested  capital  will  continue  at  the  same 
rapid  rate  as  it  has  in  the  past  five  years.  The  chances  are  rather 
that  it  will  tend  to  decline  somewhat.  Only  a  change  of  manage- 
ment, therefore,  would  be  likely  to  put  the  stock  at  a  higher  figure 
than  those  already  noted. 

Undoubtedly  control  of  the  Central  would  readily  sell  at  a  high 
figure.  But  the  ownership  of  the  road  has  not  changed  in  more 
than  half  a  century,  and  there  seems  little  likelihood  of  a  change  in 
either  management  or  policy  now. 


NEW  YORK,  CHICAGO   AND   ST.  LOUIS  RAIL- 
ROAD COMPANY. 

The  "Nickel  Plate,"  as  it  is  familiarly  known,  was  one  of  those 
mushroom  lines,  built  to  all  intents  for  speculative  purposes,  like 
the  West  Shore,  in  the  early  eighties.  The  main  object  of  the  con- 
struction of  the  road  apparently  was  simply  to  "hold  up"  the  Van- 
derbilts.  Whether  or  no  the  object  was  successful,  it  is  certain 
at  least  that  the  Nickel  Plate,  like  the  West  Shore,  came  under 
Vanderbilt  ownership,  and  so  remained. 

The  road  was  opened  for  operation  in  1882.  Fierce  rate  wars 
resulted  in  the  bankruptcy  of  the  road  in  1886,  and  likewise  in  the 
cutting  down  of  the  Lake  Shore's  dividend  of  8%  in  1883  to  noth- 
ing in  1885-6.  The  Nickel  Plate  was  foreclosed  in  1887,  and  the 
New  York,  Chicago  &  St.  Louis  Railroad  succeeded  the  old  com- 
pany. 

The  road  operates  523  miles  from  Buffalo  to  Chicago,  abso- 
lutely paralleling  the  Lake  Shore.  It  is,  however,  merely  a  single 
track  line,  and  no  attempt  has  been  made  to  bring  it  up  to  the 
Lake  Shore  standard. 

The  Lake  Shore  Railroad  holds  $6,240,000  of  the  common, 
$2,503,000  of  the  first  preferred,  and  $6,275,000  of  the  second  pre- 
ferred ;  that  is  to  say,  working  control  of  the  road.  The  directorate 
of  1906  included  nine  New  York  Central-Lake  Shore  directors,  to- 
gether with  William  H.  Canniff,  president  of  the  road;  John  S. 
Kennedy,  Ralph  W.  Hickox  and  W.  Emlen  Roosevelt.  The  Nickel 
Plate  has  no  ownership  in  other  stocks,  and  is  simply  a  subsidiary 
line  of  the  Lake  Shore.  The  road,  however,  is  operated  independ- 
ently. 

Capitalization. 

The  Nickel  Plate  has  practically  no  leased  lines  (9  miles),  and 
its  nominal  capitalization  is  therefore  its  actual  capitalization.  This, 
on  January  1st,  1907,  was  as  follows: 

Common  stock $14,000,000 

First  preferred  stock 5,000,000 

31  (481) 


482  NEW  YORK,  CHICAGO  &  ST.  LOUIS 

Second  preferred  stock 11,000,000 

Total   $30,000,000 

Bonds  outstanding 19,397,000 

Nominal    capital $49,397,000 

Approximate  capitalization  per  mile $94,449 

Miles    operated 523 

Net  earnings  on  total  capitalization 6.0% 

Stock  on  net  capitalization 60% 

Fixed  charges  on  total  net  income 41% 

Factor  of   Safety 59% 

Included  under  fixed  charges  was  $140,053,  paid  as  principal  on 
car  trusts. 

The  capitalization  per  mile,  $94,449,  is  for  a  single  track  line, 
as  compared  with  $78,987  per  mile  for  the  four-tracked  Lake 
Shore.  The  Lake  Shore  is  one  of  the  best  equipped  and  finest  built 
railroads  in  the  United  States.  It  is  easy  to  see,  therefore,  that  the 
Nickel  Plate  is  under  the  handicap  of  a  highly  inflated  capitalization. 
It  is  not  probable  that  the  road  ever  cost,  in  the  level  country 
through  which  it  runs,  more  than  one-third  of  its  capitalization. 

Yet  even  with  all  this  "water,"  the  road's  earnings  are  not  as 
low  as  might  be  expected.  In  1906  net  earnings  showed  6.0%  on  the 
capitalization,  as  against  5.8%  on  the  New  York  Central  and  about 
13%  for  the  Lake  Shore. 

The  capitalization  is  distributed  in  such  a  way  as  to  forestall 
a  second  visit  of  the  sheriff,  the  stock  representing  60%  of  the  total 
capitalization.  Fixed  charges  consumed  only  41%  of  the  total  net 
income,  leaving  a  factor  of  safety  for  the  interest  on  the  securities 
of  nearly  60%. 

Increase  of  Capitalization. 

Neither  the  stock  nor  the  bonded  indebtedness  of  the  road  has 
been  materially  changed  since  its  reorganization  up  to  the  close  of 
1906.  Probably  in  this  regard  the  Nickel  Plate  is  unique,  for  cer- 
tainly there  are  few  roads  in  the  country  which  have  remained  for 
twenty  years  at  the  same  level  of  capitalization.  The  road,  how- 
ever, has  been  prosperous  latterly,  and  in  1(H)6  $10,000,000  4% 
debentures  were  authorized,  but  not  issued.     The  money  so  derived 


NEW  YORK,  CHICAGO  &  ST.  LOUIS 


483 


was  to  be  used  to  purchase  4,000  new  cars,  and  this  would  enable 
the  company  to  save  considerable  sums  per  annum  for  hire  of  equip- 
ment. There  was  a  per  diem  mileage  balance  in  the  cost  of  transpor- 
tation for  1906  of  $304,711,  a  considerable  sum  for  a  road  doing  such 
a  volume  of  business.  It  was  equivalent  to  the  hire  of  2,800  cars 
through  the  year. 

Character  of  Traffic. 

The  Nickel  Plate  does  a  very  large  business  and  is  dependent 
upon  no  single  interest  for  its  prosperity.  The  largest  single  item 
in  its  tonnage  was  coal  and  coke.  Even  this  amounted  to  less  than 
15%.  Passenger  earnings  were  comparatively  very  small,  repre- 
senting only  15%  of  the  gross  earnings.  The  Nickel  Plate  is  prac- 
tically a  freight  road  with  a  very  solid  character  of  traffic. 


Stability  of  Earnings. 

With  no  increase  in  capital  or  mileage,  the  gross  earnings  of 
ten  years  have  risen  from  five  and  a  half  million  dollars  in  1896  to 
nearly  ten  million  dollars  in  1905,  increasing  very  evenly,  as  the  fol- 
lowing shows : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896 

523 
523 
523 
523 
523 
523 
523 
523 
523 
523 
523 

S5.587.766 
5,815,217 
6,391,421 
6,919,985 
7,023,358 
7,485,484 
7,138,899 
8,448,320 
8,645,374 
9,108,730 
9,902,208 

$10,693 
11,129 

1897. . 

1898  . 

12,220 
13,230 
13,428 
14,312 
13,649 
16,153 
16,528 
17,416 
18,933 

1899 

1900 

1901 

1902 

1903 

1904. . 

1905 

1906. . 

Maintenance. 


Previous  to  1905,  considerable  sums  for  improvements  had 
been  charged  to  operating  expenses.  In  1905  these  amounts  for 
improvements  were  separately  itemized,  but  they  have  been  included 
in  the  figures  for  1905  and  1906  in  order  to  keep  the  comparisons  for 
the  seven  years  on  the  same  basis.  Under  this  arrangement  the  items 
appear  as  follows : 


484 


NEW  YORK,  CHICAGO  &  ST.  LOUIS 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900 

2,313,905 
2,561,082 
2,331,885 
2,504,699 
2,682,149 
2,774,606 
3,030,991 

$1,656 
1,716 
1,939 
2,197 
2,319 
2,429 
2,838 

$1,255 
1,718 
1,560 
2,296 
2,519 
2,459 
2,617 

$2,911 

1901 

3,434 

1902 

3,499 

1903 

4,493 

1904 

1905 

4,828 
4,889 

1 906 

5,455 

Average.  .  .  . 

2,599,902 

$2,156 

$2,059 

$4,215 

Lake  Shore . . . 
Panhandle. .  .  . 
Wabash 

3,102,376 

2,193,454 

880,032 

4,308 
2,567 
1,332 

4,093 
3,680 
1,370 

8,401 
6,247 
2,702 

It  will  be  seen  from  the  above  that  the  traffic  density  of  the 
road  is  high — almost  equalling  that  of  the  Lake  Shore  and  very 
considerably  exceeding  that  of  the  New  York  Central  or  the 
Michigan  Central.  As  it  is,  however,  very  largely  a  freight  road, 
it  has  not  required  the  same  standard  of  maintenance  as  the  Lake 
Shore.  Charges  have  carried  considerable  sums  devoted  to  im- 
provements, which  including  $250,000  set  aside  from  surplus  in  1905, 
and  $350,000  so  devoted  in  1906,  have  been  as  follows : 

1901    $756,000 

1902  585,000 

1903  645,572 

1904  674,467 

1905  787,340 

1906  982,889 


Surplus  Earnings. 

Both  the  nominal  surplus  and  the  actual  surplus  derived  from 
adding  to  the  former  the  amounts  shown  above  as  devoted  to  im- 
provements, in  pursuance  to  the  policy  of  this  book,  are  below : 

Surplus  Shown.  Actual  Surplus. 

1901 $    618,931  $1,374,391 

1902 597,122  1,182,122 

1903 604,248  1,249,820 

1904 618,916  1 ,293,382 

1905 870.362  1 ,407,702 

1906 1.115.702  1,748.601 

As  already  noted,  about  $140,000  per  year  has  been  paid  from 


NEW  YORK,  CHICAGO  &  ST.  LOUIS  485 

earnings  as  principal  on  the  car  trust,  and  included  as  part  of  the 
fixed  charges.  If  this  amount  were  added  to  the  surplus  of  1906,  the 
total  would  have  been  $1,888,691.  This  would  have  been  sufficient 
to  have  paid  the  full  5%  on  both  the  first  and  second  preferred  and 
show  7.7%  on  the  common  stock. 

Dividend  Record. 

Two  per  cent,  on  the  first  preferred  was  paid  in  1897,  none  in 
■1898,  and  since  that  time  5%  regularly. 

Two  per  cent,  also  on  the  second  preferred  in  1900  and  3% 
subsequently  up  to  1906.  In  the  latter  year  the  stock  was  put  on  a 
4%  basis.     Nothing  has  ever  been  paid  on  the  common. 

The  Balance  Sheet. 

As  of  December  31st,  1906,  the  balance  sheet  showed  : 

Current  assets $3,008,073 

Current  liabilities 2,443,792 

Leaving  a  working  balance  of $      564,281 

There  were,  however,  items  in  suspense  to  the  amount  of  $670,- 
925,  or  sufficient  to  wipe  out  the  balance  of  working  capital.  The 
item  of  cash  amounted  to  $1,125,946,  and  the  balance  to  credit  of 
profit  and  loss  to  $511,625. 

The  company  was  obviously  in  need  of  working  capital. 

Investment  Value. 

The  steady  improvement  in  the  affairs  of  the  Nickel  Plate  is 
shown  in  the  increase  in  gross  earnings,  with  very  slight  increase  of 
capital,  of  from  $5,800,000  in  1897  to  $9,900,000  in  1906,  and  an 
increase  in  net  earnings  of  from  $994,000  in  1897  to  $2,300,000  in 
1906.  Excluding  the  amounts  charged  to  operating  expenses  for 
new  construction  and  new  equipment,  the  actual  net  earnings  of 
1906  were  nearly  $3,000,000.  If  the  figure  of  $1,888,000  be  taken 
as  the  true  surplus  for  the  year  and  the  half  of  this  had  been  devoted 
to  improvements,  there  would  have  been  left  $944,000,  or  sufficient 
to  pay  the  full  5%  on  both  classes  of  preferred  stock  and  1%  on 
the  common. 

The  preferred  stocks  are  entitled  to  5%  non-cumulative  divi- 
dends, and  after  5%  has  been  paid  on  the  common  all  classes  of  stock 
share  alike.    As  the  first  preferred  has  been  on  a  5%  basis  since  1899, 


486  NEW  YORK.  CHICAGi  )  &  ST.  LOUIS 

and  as  the  fixed  charges  in  1906  consumed  only  about  40%  of  the 
actual  total  net  income,  it  may  be  taken  as  a  solid  dividend  stock. 
It  sold  as  high  as  $124  per  share  in  1902,  declining  to  par  in  1903, 
rising  again  to  $121  in  1906. 

The  second  preferred  on  a  3%  basis  sold  as  high  as  $102  in 
1906,  the  highest  ([notation  ever  reached.  On  a  4%  basis  it  sold  as 
low  as  $80  per  share  in  1907.  This  was  the  lowest  quotation  also 
for  1906.  Save  for  the  scarcity  of  money  and  the  improvement 
requirements  of  the  road,  there  was  no  reason  why  the  full  5%. 
should  not  have  been  paid  on  the  second  preferred  in  1906.  It  was 
amply  earned  on  the  most  conservative  calculation. 

Although  on  the  surplus,  as  estimated  above,  7.7%  was  ap- 
parently earned  on  the  common  stock  in  1906,  yet  on  a  dollar-for- 
dividend  and  a  dollar-for-improvement  policy  all  of  this  amount 
would  practically  have  been  wiped  out.  Under  the  conservative 
policy  of  the  road,  therefore,  it  is  improbable  that  dividends  on  this 
stock  will  be  paid  for  some  years  to  come.  It  sold  as  high  as  $57 
per  share  in  1902,  declining  to  S25  per  share  in  1904,  rising  to  $76 
in  1905  and  declining  as  low  as  $35  per  share  in  March  of  1907.  It 
will  be  seen  that  the  fluctuations  were  wide  and  offered  very  con- 
siderable opportunities  for  profit.  Purchased  at  somewhere  around 
the  quotations  of  1904  and  1907  and  put  by,  the  stock  would  un- 
doubtedly show  a  handsome  increment  to  the  investor  who  was 
willing  to  wait. 

The  company's  earnings  are  amply  sufficient  to  meet  the  interest 
requirements  on  the  $10,000,000  new  capital  provided,  and  this  new 
capital  should  have  an  immediate  effect  upon  the  earnings  of  the 
road,  if  for  no  other  reason  than  that  the  company  for  several  years 
has  been  paying  out  as  much  in  hire  of  new  equipment  as  the 
interest  charges  would  have  amounted  to.  With  these  prospects  the 
stock  should  show  a  steady  enhancement  in  value. 


NEW   YORK,   NEW   HAVEN  AND   HARTFORD 

RAILROAD. 

The  "New  Haven,"  as  it  is  familiarly  known,  had  already  become 
through  a  series  of  consolidations  of  minor  roads,  by  far  the  most 
important  rail  system  in  New  England,  when,  in  1907,  it  practically 
absorbed  the  Boston  and  Maine  system,  and  through  the  latter,  the 
Maine  Central  as  well,  thus  gaining  very  near  to  a  monopoly  of 
Xew  England  transportation.  Even  before  this  merger,  it  directly 
operated,  within  a  very  circumscribed  territory,  over  two  thousand 
miles  of  track,  with  921  miles  of  extra  main  track.  It  controls  the 
larger  part  of  the  shipping  trade  along  the  shores  of  the  territory 
through  which  it  runs,  practically  eliminating  serious  competition 
in  this  direction,  and  in  1906  it  owned  about  75%  of  the  street  rail- 
ways of  Connecticut,  and  in  addition  it  controlled  by  ownership  of  a 
clear  majority  of  the  stock,  the  Xew  York,  Ontario  &  Western,  with 
546  operated  miles,  and  over  $7,000,000  per  annum  of  gross  earn- 
ings. 

Always  a  large  dividend  earner,  the  road  under  the  present 
regime  has  made  noteworthy  strides,  and  the  year  of  1906  was  a 
banner  year  in  its  history.  Partly  through  the  unusual  increase  of 
earnings,  partly  through  large  savings  in  the  cost  of  transporta- 
tion, and  partly  through  changes  of  bookkeeping  methods,  the  sur- 
plus shown  in  1906  was  half  again  as  large  as  the  average  for  the 
five  previous  years.  Even  this  large  surplus  shown  did  not  represent 
the  true  earnings  of  the  road,  some  considerable  equities  having  been 
concealed  in  the  subsidiary  companies. 

The  road  is  one  of  the  most  independent  in  the  United  States, 
but  it  is  understood  that  with  the  completion  of  the  Pennsylvania 
improvements  across  Manhattan  and  to  Long  Island,  a  working 
alliance  will  be  concluded  between  the  two  lines,  with  a  connecting 
link,  so  that  trains  may  be  run  on  an  all-rail  line  from  Boston  to  the 
farthest  limits  of  the  Pennsylvania  system,  as  is  now  achieved 
through  ferriage  across  from  Mott  Haven. 

The  New  Haven  is  also  noteworthy  as  being  one  of  the  first 
of  the  larger  roads  of  the  country  to  introduce  electric  traction  on 

•  (487) 


488    NEW  YORK,  NEW  HAVEN  &  HARTFORD 

its   subsidiary   lines,   and   this    form   of   power   is   gradually   being 
applied  to  the  main  system. 

History. 

The  New  Haven  represents  the  consolidation  in  1872  of  the 
New  York  &  New  Haven,  and  the  Hartford  &  New  Haven  lines. 
The  policy  of  absorption  and  consolidation,  through  purchase  or 
lease  of  minor  roads  has  been  followed  steadily,  the  principal  items 
being  the  lease  of  the  Housatonic  in  1892,  of  the  Old  Colony  Rail- 
road in  1893,  and  of  the  New  England  Railroad  in  1898.  The 
New  Haven  Steamship  Company  was  acquired  in  1900,  and  the  Old 
Colony,  the  Providence,  Stonington  and  other  lines  by  lease,  these 
various  lines  being  consolidated  into  the  New  England  Navigation 
Company,  with  gross  earnings  in  1906  of  $4,917,194,  and  a  capital 
stock  of  $10,000,000,  the  whole  of  which  is  owned  by  the  New 
Haven  road. 

With  the  development  of  the  New  England  trolley  system,  the 
New  Haven  gradually  took  over  a  large  number  of  the  lines  within 
its  territory,  these  being  merged  into  the  Consolidated  Railway  Com- 
pany with  a  capital  of  $10,000,000,  likewise  all  owned  by  the  com- 
pany ;  this  organization  having  a  gross  income  in  1906  of  $5,409,438. 

In  1904  controlling  interests  in  the  Central  New  England  Rail- 
road and  the  Newburg,  Dutchess  &  Connecticut  were  purchased,  and 
in  the  same  year  $29,160,000  par  value  of  the  common  and  $2,200  of 
the  preferred,  a  majority  of  both  classes,  of  the  stock  of  the  New 
York,  Ontario  &  Western  were  acquired,  the  net  cost  being  $13,- 
108,398. 

The  Central  of  New  England  owns  the  Poughkeepsie  bridge 
and  a  small  line  beyond,  giving  a  direct  connection  with  the  Ontario 
road.  Through  this  purchase  the  New  Haven  distributes  coal  from 
the  Scranton  and  W'ilkesbarre  region  to  New  England,  directly  over 
its  own  lines. 

In  1906,  owing  to  opposition  in  Massachusetts  to  the  New 
Haven's  ownership  of  street  railways  in  that  State,  the  larger  part 
of  the  New  Haven's  interest  in  Massachusetts  trolley  lines  was  dis- 
posed of  to  a  voluntary  association  known  as  the  New  England 
Investment  and  Security  Company. 

No  single  interest  dominates  the  New  Haven,  its  stock  being 
very  widely  held  by  small  shareholders  in  NewT  England.  In  1905 
the  road  reported  10,842  shareholders.  For  some  years  interests 
identified  with  the  New  York  Central  have  been  prominent  in  the 
directorate,  Vanderbilt  interests  being  directly  represented  by  H. 
McK.  Twombly,  Morgan  interests  by  Mr.  Morgan  himself,  the  New 


NEW  YORK,  NEW  HAVEN  &  HARTFORD        489 

Haven  being  one  of  the  few  large  roads  outside  of  the  New  York 
Central,  in  which  Mr.  Morgan  is  actively  a  director;  and  the  Stand- 
ard Oil  interests  by  William  Rockefeller.  At  the  beginning  of  1905 
President  Cassatt  of  the  Pennsylvania  was  elected  a  director,  and 
since  that  time  the  alliance  of  the  New  Haven  with  the  Pennsylvania 
has  steadily  increased  in  scope.  The  other  directors  in  1906  included 
Charles  S.  Mellen,  president;  Charles  F.  Brooker,  vice-president  of 
the  board;  George  MacCulloch  Miller,  George  J.  Brush  and  James 
S.  Hemingway  of  New  Haven ;  Charles  F.  Choate  and  Nathaniel 
Thayer  of  Boston ;  I.  de  Ver  Warner  of  Bridgeport ;  Frank  W. 
Cheney  of  South  Manchester,  Conn. ;  Edwin  Milner  of  Moosup, 
Conn. ;  William  Skinner  of  Holyoke,  Mass. ;  D.  Newton  Barney  of 
Farmington,  Conn. ;  Robert  W.  Taft,  Providence ;  John  H.  Whitte- 
more  of  Naugatuck,  Conn.,  and  James  S.  Elton  of  Waterbury,  Conn. 
In  consequence  of  the  Boston  &  Maine  merger,  in  June,  1907, 
Hon.  Richard  Olney  of  Boston,  Chas.  M.  Pratt  and  Lewis  Cass 
Ledyard  of  New  York,  directors  in  the  B.  &  M.,  were  added  to  the 
New  Haven  directorate ;  and  also  Henry  K.  McHarg  of  Stamford, 
Frederick  F.  Brewster  and  A.  Heaton  Robertson  of  New  Haven. 
This  added  two  more  representatives  of  Standard  Oil  interests, 
Messrs.  Pratt  and  Brewster,  to  the  board. 

Capitalization. 

Owing  to  the  numerous  consolidations  and  mergers  the  capital- 
ization of  the  New  Haven  is  a  rather  complicated  affair,  involving 
numerous  leases,  guarantees  and  the  like.  The  statement  of  1906 
showed  a  funded  debt  including  the  debentures  and  debts  of  the 
merged  roads  and  bonded  debt  of  constituent  companies  of  $112,- 
543,725.  In  addition  to  this  there  were  obligations  to  the  owners 
of  leased  roads  of  $6,127,882,  and  bonds  of  leased  roads  not  con- 
trolled by  the  New  Haven,  interest  on  which  is  paid  or  guaranteed 
by  the  New  Haven,  to  the  amount  of  $20,805,000. 

These  items  brought  the  funded  debt  of  the  system  up  to  $139,- 
476,607.  The  statement  also  includes  the  outstanding  capital  stocks 
of  operated  companies,  controlled  by  stock  ownership  to  the  amount 
of  $1,167,119.  This  latter  item,  with  the  total  of  funded  debt  given 
above,  and  the  capital  stock  of  the  New  Haven  given  below,  brought 
the  capitalization  of  the  road  up  to  $224,000,826. 

But  the  New  Haven  paid  as  rentals  on  its  leased  lines  in  1906 
$3,935,593,  a  larger  sum  than  the  interest  on  its  bonded  debt.  A 
part  of  the  rentals  paid  is  in  the  form  of  interest  on  the  debt  ot 


490    NEW  YORK,  NEW  HAVEN  &  HARTFORD 

leased  lines  already  included  in  the  above  estimate  of  gross  capitali- 
zation. From  the  statement  given  in  the  report,  it  is  impossible 
to  segregate  these  items.  In  the  make-up  of  the  table  of  capitaliza- 
tion given  below,  $836,577  rentals  paid  on  the  New  England  Rail- 
road and  $848,570  interest  paid  as  part  rentals  have  been  deducted 
from  the  rentals  paid,  and  the  balance,  $2,240,443,  capitalized  at  4' ,  . 
pursuant  to  the  plan  of  this  book.  As  there  is  possibly  here  some 
duplication,  this  may  introduce  some  error  into  the  estimate,  but  it  is 
not  large,  and  it  is  to  be  recalled  that  the  estimates  of  capitalization 
are  simply  approximations  in  any  event.  The  table  for  June  30th, 
1906,  would  then  stand  : 

Common  stock $     83,357,100 

Stocks  of  operated  companies 1,167,119 

Funded  debt,  debentures 70,315.725 

Bonds    20,043,000 

Bonds  of  constituents  companies.  .  .        22,185,000 
Leased    road   obligations 6,127,882 

Total  capital $  203,195,826 

Other  debt  (interest  as  part  rental) 20,805,000 

Rentals  capital  at  4% 56,011,075 

Approximate  gross  capitalization $  280,011,901 

Securities  held 66,097,540 

Approximate  net  capital $213,914,361 

Approximate  net  capital,  per  mile $103,741 

Average   miles   operated 2,062 

Net  earnings  on  net  capital 8.2% 

Stock  on  net  capitalization 40% 

Fixed  charges  on  total  net  income 48% 

Factor   of    Safety 52% 

In  1907,  the  absorption  of  the  Consolidated  Railway  and  the 
New  England  Navigation  Company,  added  $30,000,000  of  new 
stock,  and  this,  with  other  issues  during  the  year  brought  up  the 
total  amount  of  stock  to  $121,878,100.  A  considerable  part  of  the 
new  stock  created  was  exchanged  for  stock  of  the  Boston  &  Maine. 
The  $66,000,000  of  securities  held,  shown  in  the  above  table, 
directly  yielded,  in  1906,  to  the  New  Haven,  only  $1,883,568,  or  a 
little  less  than  3r<  .  There  were,  however,  undistributed  equities  in 
several  companies,  which  would  very  considerably  swell  this  income, 


NEW  YORK,  NEW  HAVEN  &  HARTFORD        491 

so  that  the  book  valuation  of  $66,000,000  is  probably  in  no  wise 
excessive. 

On  this  basis  it  will  be  seen  that  the  approximate  net  capitaliza- 
tion of  the  New  Haven  amounts  to  about  $100,000  per  mile,  as 
against  a  similar  estimate  of  $77,660  for  the  Boston  &  Maine,  $123,- 
188  per  mile  for  the  New  York  Central,  and  $132,800  for  the  New 
Haven's  subsidiary  line,  the  New  York,  Ontario  &  Western.  The 
New  York  &  Ontario's  gross  earnings  amount  to  $13,000  per  mile; 
the  New  York  Central's  to  $24,000  per  mile,  and  the  New  Haven's 
to  $25,700  per  mile.  It  will  be  seen,  therefore,  that  on  the  basis  of 
its  earnings,  the  capitalization  of  the  New  Haven  is  comparatively 
low. 

This  fact  is  further  attested  by  the  percentage  which  the  net 
earnings  bear  to  the  net  capitalization.  In  1906  the  net  earnings 
amounted  to  8.2%  on  this  estimate  of  net  capitalization,  as  against 
5.8%,  for  the  New  York  Central,  3%  for  the  New  York  &  Ontario, 
5.6%  for  the  Boston  &  Maine,  and  8%  for  the  Pennsylvania. 

It  will  be  seen  that  the  stock  of  the  road  represents  40%  of  its 
estimated  net  capitalization,  while  fixed  charges  in  1906  consumed 
only  48%  of  the  total  net  income,  leaving  a  factor  of  safety  on  the 
underlying  securities  and  guarantees  of  the  road  of  52%.  The 
factor  of  safety  on  the  underlying  securities  of  the  New  York  Cen- 
tral is  only  36%,  and  on  the  Boston  &  Maine  it  is  only  22%.  It 
will  be  seen,  therefore,  that  the  New  Haven  securities  belong  in  the 
Pennsylvania  class ;  that  is  to  say,  the  available  net  income  could 
decline  one-half  before  the  interest  or  guarantee  would  become 
impaired. 

Equities  Owned. 

The  most  important  single  item  in  the  list  of  securities  owned 
was  the  controlling  interest  in  the  New  York,  Ontario  &  Western. 
This  is  carried  on  the  books  at  $13,108,397,  the  net  cost  of  the  stock 
to  the  company.  In  1906  the  Ontario  was  paying  a  2%  dividend, 
which  on  the  cost  of  the  stock  to  the  New  Haven,  yielded  the  road 
above  4.4%  on  its  investment.  There  was  no  undistributed  equity 
in  the  Ontario's  earnings  for  the  year,  but  with  its  new  connections 
with  the  New  Haven,  giving  the  road  a  direct  outlet  into  New 
England,  and  with  the  New  Haven  management,  the  earnings  of  the 
road  should  steadily  increase,  so  that  this  should  become  an  asset 
of  steadily  enhancing  value. 

The  New  Haven  owned  the  entire  capital  stock,  $10,000,000,  of 
the  Consolidated  Railroad  Company,  operating  its  trolleys,  and  on 


492    NEW  YORK,  NEW  HAVEN  &  HARTFORD 

this  received  a  4%  dividend  in  1906,  and  in  addition  to  the  above 
there  was  an  undistributed  surplus  of  $120,000. 

Similarly  the  New  Haven  received  4%  on  the  $10,000,000  stock 
of  the  New  England  Navigation  Company,  and  in  1906,  after  all 
payments  and  the  writing  off  of  $393,445  for  depreciation  of  steam- 
ers and  investments,  there  still  remained  an  undistributed  surplus 
of  $163,000.  This  stock  was  carried  on  the  books  of  the  company  at 
a  valuation  of  $5,948,469. 

In  the  spring  of  1907,  the  Navigation  Co.  and  the  Consolidated 
were  merged,  on  a  basis  of  $20,000,000  for  the  Navigation  Co.,  $10,- 
000,000  for  the  Consolidated;  and  the  new  company  was  in  turn 
absorbed  by  the  New  Haven,  exchanging  share  for  share,  thus  add- 
ing $30,000,000  of  New  Haven  stock. 

The  New  Haven  owns  a  controlling  interest  in  the  Central  New- 
England  Railroad,  and  in  addition  to  this,  $5,904,000,  out  of  a 
total  of  $7,250,000  of  its  income  bonds,  the  whole  being  carried  at 
a  valuation  of  $5,440,791 ;  on  this  no  interest  was  paid  in  1906. 
The  statement  shows  that  operating  expenses  on  the  Central  of 
New  England  in  1906  amounted  to  90%,  this  high  figure  being  due 
to  the  rebuilding  and  strengthening  of  the  Poughkeepsie  bridge. 
Had  the  road  been  operated  on  a  70%  basis,  this  would  have  yielded 
a  surplus  of  upwards  of  $330,000  instead  of  the  $7,522  shown,  from 
which,  if  this  amount  had  been  used  in  the  interest  payments  on  the 
income  bonds,  the  New  Haven  would  have  derived  about  $250,000 
for  the  year. 

These  are  the  New  Haven's  principal  equities. 

Included  in  the  $66,000,000  of  securities  owned  were  "market- 
able stocks  and  bonds,"  to  the  value  of  $15,994,585,  of  which  the 
debentures  of  the  Consolidated  Railway  Company  made  up  the 
larger  part,  and  real  estate  in  Boston,  held  for  sale  at  $5,210,000. 

Increase  of  Capitalization. 

If  the  nominal  capital  and  gross  earnings  of  the  New  Haven 
for  a  series  of  six  years  be  compared,  the  result  would  stand  as 
follows : 


Year 

Common 
Stock 

Funded              Total                Gross 
Debt               Capital            Earnings 

1900 

$54,685,400 
83,357,100 

$27,461,825     $82,147,225     $40,352,152 

1906 

70,315,725     153,672,825       52,984,321 

Increase  over  six  years:  Total  capital,  87%;  gross  earnings,  31%. 


NEW  YORK,  NEW  HAVEN  &  HARTFORD        493 

This  comparison  shows  a  very  heavy  increase  in  the  capitaliza- 
tion with  comparatively  small  increase  in  the  gross  earnings,  and 
only  $36,000,000  of  the  increase  was  represented  by  the  purchase  of 
new  securities.  The  showing,  however,  is  totally  misleading,  owing 
to  the  fact  that  the  New  Haven  was  paying  a  larger  sum  in  rentals 
in  1900  than  in  1906,  and  that  in  both  these  cases  the  capitalization 
of  rented  lines  exceeded  the  funded  debt  of  the  company.  Capitaliz- 
ing the  rentals  of  1900  on  a  4%  basis,  the  gross  capitalization  of  the 
New  Haven  in  that  year  was  in  the  neighborhood  of  $194,000,000, 
and  deducting  $30,000,000  of  securities  owned,  the  net  capitalization 
was  around  $164,000,000. 

When  this  figure  is  compared  with  the  estimated  figure  of  1906, 
amounting  to  $213,000,000,  it  will  be  seen  that  the  actual  increase 
in  the  net  capitalization,  in  these  six  years,  has  amounted  to  only 
about  23%.  It  is  this  percentage  of  increase  which  should  rightly 
be  compared  with  the  31%  of  gross  earnings  of  the  New  Haven 
proper. 

The  New  Haven's  recent  issues  have  covered  a  wide  variety 
of  improvements ;  part  has  been  consumed  in  the  street  railway 
system,  the  apparent  aim  of  the  company  being  to  build  up  a  system 
which  shall  practically  duplicate  its  steam  roads.  A  six-track  road 
is  being  constructed  from  New  Rochelle  to  Mott  Haven,  designed  to 
connect  by  way  of  a  bridge  by  way  of  Randall's  Island  and  Ward's 
Island,  with  the  Pennsylvania  in  Long  Island  City.  The  company  is 
complying  with  the  legislative  enactment  requiring  the  substitution 
of  electric  traction  or  some  other  form  of  power  through  the  Grand 
Central  tunnel  and  approaches,  and  the  line  from  Woodlawn  to 
Stamford  is  to  be  run  by  electric  power ;  and  a  double  track  short 
line  has  been  authorized  to  Danbury,  Conn.,  which  will  greatly 
improve  the  service  on  the  Housatonic  Division. 

Character  of  Traffic. 

The  most  noteworthy  fact  about  the  New  Haven  is  that  its 
passenger  earnings  nearly  equal  its  freight  earnings.  While  the 
freight  earnings  since  1900  have  risen  only  from  $19,450,000  to 
$27,247,000,  passenger  earnings  have  risen  from  $16,750,000  in 
1900  to  $25,250,000  in  1906. 

Passenger  earnings  on  the  New  Haven  represent  about  48% 
of  the  gross  earnings,  while  on  the  New  York  Central  they  repre- 
sent only  about  30%,  and  on  the  Pensylvania  only  20%. 

The  average  freight  rate  received  by  the  New  Haven  amounted 


494        NEW  YORK,  NEW  HAVEN  &  HARTFORD 

in  1906  to  1.40  cents  per  ton  per  mile,  as  against  1.16  cents  for  the 
Boston  &  Maine,  .90c.  for  the  Boston  &  Albany,  .64c.  on  the  New- 
York  Central,  and  .64c.  on  the  Pennsylvania. 

With  such  freight  rates  as  these,  it  is  scarcely  a  wonder  that 
the  New  Haven  is  able  to  pay  an  8%  dividend  and  practically  earns 
about  14%  on  its  capital  stock.  The  freight  density  of  the  road 
is  low,  much  less  than  half  that  of  the  New  York  Central  in  1906, 
and  scarcely  more  than  a  fifth  that  of  the  Pennsylvania.  The  com- 
pany does  not  itemize  its  freight  traffic,  but  it  is  undoubtedly  made 
up  largely  of  miscellaneous  articles,  the  cost  of  handling  of  which  is 
high,  but  on  which  it  receives  a  liberal  rate. 


Stability  of  Earnings. 

The  consolidations  of  the  New  Haven  had  largely  been  carried 
out  by  the  beginning  of  the  fiscal  year  of  1898-99,  so  that  since  this 
time  the  mileage  of  the  system  has  remained  practically  unchanged. 
Within  this  period  it  will  be  seen  that  the  gross  earnings  have  in- 
creased from  $37,000,000  to  nearly  $53,000,000  in  eight  years.  In 
the  same  time  the  earnings  per  mile  have  risen  from  $18,235  to 
$25,695. 


Year 


Miles  Operated 


Gross  Earnings 


1895-6. 
1896-7. 
1897-8. 
1898-9. 
1899-0. 
1900-1. 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1905-6. 


1,404 

$30,345,630 

1,464 

29,623,333 

1,464 

30,322,738 

2,047 

37,123,917 

2,038 

40,325,151 

2,027 

40,132,311 

2,027 

43,521,087 

2,027 

47,296,078 

2,032 

48,282,909 

2,075 

49,981,948 

2,062 

52,984,322 

Per  Mile 


820,724 
20,231 
20,700 
18,235 
19,844 
19,796 
21,467 
23,329 
23,761 
24,082 
25,695 


This  very  considerable  increase  of  earnings  has  not  been  accom- 
plished, as  with  the  Baltimore  &  Ohio,  or  even  on  the  Pennsylvania, 
through  a  heavy  increase  in  freight  rates.  The  year  of  1899  was 
bed-rock  year  for  eastern  roads  generally,  but  the  average  freight 
rate  received  by  the  New  Haven  in  1906  was  practically  the  same  as 
in  1899.  In  other  words,  while  the  average  rate  of  the  Pennsylvania 
increased  24','  .  and  that  of  the  Baltimore  &  Ohio  nearly  50%,  the 
rates  on  the  New  Haven  remained  practically  stationary.  It  is 
needless  to  say  that  a  growth  in  earnings  from  an  actual  increase  in 
business  is  a  great  deal  healthier  than  from  rising  freight  rates,  and 
it  is  for  this  reason,  as  well  as  the  practical  monopoly  which  it  enjoys 


NEW  YORK,  NEW  HAVEN  &  HARTFORD        495 

in  its  territory,  that  the  earnings  of  the  New  Haven  may  be  regarded 
as  much  more  stable  than  those  of  most  other  eastern  roads. 

Maintenance. 

For  years  the  maintenance  of  the  New  Haven  has  been  high, 
the  items  for  six  years  comparing  as  follows : 


Year 

Traffic  Density 

Mainten 

ance  per  Mile. 

Tntal 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

637,581 
712,651 
803,087 
817,709 
839,959 
915,909 

$2,701 
3,038 
3,077 
2,691 
2,490 
2,723 

$2,194 
2,676 
2,067 
2,315 
2,451 
2,749 

$4,895 
5,714 
5,144 
5,006 
4,941 
5,472 

Average.  . .  . 

787,816 

$2,786 

$2,408 

$5,194 

Bost.  &  M 

N.  Y.  Cent. . . . 

767,535 
2,096,289 

1,813 
2,741 

1,533 
3,169 

3,346 
5,910 

Miles  of  extra  main  track,  921. 

Comparison  of  the  maintenance  charges  with  the  Boston  & 
Maine  and  the  New  York  Central  are  given,  but  they  are  more  or 
less  misleading.  For  example,  with  about  an  equal  freight  density, 
the  Boston  &  Maine's  maintenance  in  this  period  averaged  nearly 
$2,000  per  mile  less  than  on  the  New  Haven,  but  the  Boston  & 
Maine  shows  gross  earnings  on  only  $17,000  per  mile,  as  against 
$25,600  on  the  New  Haven.  The  latter  is  easily  in  a  position  to 
spend  more  than  the  Boston  &  Maine. 

On  the  other  hand,  with  an  average  freight  density,  within 
these  six  years,  nearly  three  times  that  of  the  New  Haven,  the  New 
York  Central  spent  a  total  of  only  about  $550  per  mile  more 
annually.  But  here  again  the  Central  earns  only  $24,300  per  mile, 
as  against  the  $25,600  for  the  New  Haven.  The  difference  is 
obviously  due  to  the  fact  that  nearly  one-half  of  the  New  Haven's 
gross  earnings  are  derived  from  passenger  traffic,  as  against  less 
than  30%  for  the  New  York  Central,  so  that  the  comparison  of 
maintenance  charges  with  freight  traffic  density,  here,  has  little  value. 
What  may  be  done  is  to  compare  the  expenditures  of  the  road  with 
itself,  and  it  will  be  seen  that  the  expenditure  per  mile  in  1906  was 
but  a  very  little  higher  than  the  average  expenditures  over  the  six 
years.  In  point  of  fact  the  road  spent  more  per  mile  for  maintenance 
in  1902  than  in  1906.  Meanwhile  gross  earnings  per  mile  had  risen 
an  even  25%.     In  other  words,  had  the  expenditures  for  1906  been 


496        NEW  YORK,  NEW  HAVEN  &  HARTFORD 

on  the  same  scale  as  those  of  1902,  they  would  have  been  nearly 
$1,700  higher  than  they  were,  and  this  difference  on  over  2,000  miles 
of  road  would  have  made  a  difference  of  $3,500,000  in  the  mainte- 
nance charges,  and  the  surplus  shown  would  have  been  reduced  by 
this  amount. 

In  point  of  fact,  in  1906,  the  road  set  aside  $3,000,000  from  its 
surplus  for  improvements,  while  the  improvements  of  1902,  amount- 
ing to  $3,403,708,  were  charged  directly  to  operating  expenses.  All 
the  practical  difference  is,  therefore,  that  the  surplus  for  1902  would 
have  been  $3,500,000  more,  or  the  surplus  for  1906  would  have  been 
$3,500,000  less  than  the  reports  show — but  one  more  of  the  multiplied 
instances  adduced  in  this  work  to  show  that  surplus  and  income  and 
all  their  like  are  largely  a  matter  of  bookkeeping. 

Improvements  from  Earnings. 

The  following  amounts  devoted  to  betterments  were  noted  in 
the  reports  as  charged  to  operating  expenses  in  the  years  indicated : 

1901-2  $2,425,815 

1901-2  3,403,708 

1902-3   1,867,817 

In  the  reports  for  1904  and  1905  the  amount  charged  to 
improvements  was  not  specially  indicated,  and  the  total  amounts  pe*r 
mile  devoted  to  maintenance  were  rather  lower  than  the  average 
of  the  three  preceding  years,  and  very  considerably  below  the  level 
of  1902.  It  is  further  to  be  noted  that  in  these  two  years  the  New 
Haven  showed  a  nominal  surplus  which  represents  less  than  the  8% 
dividends  paid  on  the  capital  stock.  In  1906,  after  maintenance 
charges  slightly  above  those  of  1904  and  1905,  the  road  was  able 
to  write  off  $3,000,000  from  the  nominal  surplus  shown. 

Surplus  Earnings. 
The  surplus  earnings  for  six  years  have  compared  as  follows: 


Year 

Per  cent. 
Surplus           Earned  on 
Common 

Dividends 

Paid  on 

Common 

Average 
Price 

1900-1 

$4,658,288 
4,678,9.59 

8.7 
8.6 

8 
8 
8 
8 
8 
8 

212 

1901-2 

221 

1902-3 

4,826,972               6.8 
6,094,756              7.6 

197 

1903-4 

191 

1904-5 

6,708,053              8.3 
10,185,377            12.2 

202 

190.5-6 

198 

NEW  YORK,  NEW  HAVEN  &  HARTFORD        497 

The  increase  for  1906,  amounting  to  50%,  is  especially  remark- 
able, and  reference  to  the  preceding  table  will  show  that  this  was 
achieved  in  the  face  of  maintenance  charges  over  $500per  mile  higher 
than  the  previous  year,  or  a  total  of  $1,100,000  over  1905.  There 
was  a  gain  of  nearly  one  million  dollars  in  other  income,  but  the 
larger  part  of  this  striking  result  was  legitimately  achieved  through 
a  reduction  in  operating  expenses.  The  cost  of  conducting  trans- 
portation was,  on  about  the  same  mileage,  over  $1,600,000  less  than 
the  preceding  year,  and  this  was  in  the  face  of  an  increase  in  gross 
earnings  of  $3,000,000.  The  most  important  item  in  this  saving  was 
a  reduction  of  about  $950,000  in  demurrage  charges,  that  is  to  say, 
amounts  paid  on  detained  cars. 

The  effect  of  this  saving,  in  the  face  of  considerably  increased 
maintenance  charges,  was  that  the  total  operating  expenses  of  the 
road  were  actually  reduced,  so  that  the  whole  gain  in  gross  earnings 
and  more  was  saved  in  the  net.  This  with  the  increased  other 
income  produced  the  result  shown. 

It  is  to  be  added  that  during  the  year  an  accident  and  casualty 
fund  was  established,  into  which  is  to  be  paid  each  six  months,  2% 
of  the  gross  earnings  from  passenger  business.  Apparently  about 
$200,000  was  diverted  from  income  into  this  fund  before  showing 
the  surplus  of  1906. 

After  charging  off  $3,000,000  for  improvements  and  better- 
ments and  $326,998  for  the  insurance  fund,  there  still  remained  from 
the  surplus  a  clear  8%  for  the  stock. 

Dividend  Record. 

The  New  Haven  has  always  been  one  of  the  record  dividend 
earners  of  the  country.  After  the  consolidation  in  1872  it  paid  10% 
straight  through  the  depression  of  1873-7  and  down  to  1893.  In 
1893  its  dividend  was  reduced  to  9%,  and  in  1895  to  8%.  It  has 
remained  at  this  level  ever  since. 

The  Balance   Sheet. 

In  the  item  of  current  assets  in  the  balance  sheet  at  the  close 
of  the  fiscal  year  of  1906,  there  is  an  entry  of  "Marketable  Securi- 
ties" of  $15,994,568.  These  securities  have  already  been  included 
in  the  item  of  securities  owned,  as  shown  in  the  capital  account,  and 
have  been  deducted  from  the  nominal  amount  of  current  assets 
shown  in  the  report.  These  securities  consist  chiefly  of  4%  deben- 
tures of  the  Consolidated  Railway  Company,  and  beyond  the  fact 
that  it  is  the  avowed  intention  of  the  company  to  sell  them,  there 

32 


•498        NEW  YORK,  NEW  HAVEN  &  HARTFORD 

is  no  more  reason  why  they  should  be  included  in  the  current  assets 
than  any  other  marketable  securities  owned  by  the  road.  With  this 
change  the  showing  was  : 

Current    assets $24,033,682 

Current  liabilities   21,139,552 

Leaving  a  working  balance  of $  2,894,130.  . 

The  item  of  bills  payable  was  rather  heavy,  amounting  to  up- 
wards of  $9,000,000,  in  addition  to  $4,500,000  of  audited  vouchers. 

But  these  rather  large  sums  were  offset  by  $18,808,659  of  clear 
cash  in  the  treasury,  so  the  company  was  fairly  well  off  for  working 
capital. 

In  addition  to  the  assets  shown  there  were  special  funds  in 
cash  and  securities  to  the  value  of  $2,764,427,  and  the  amount  to 
the  Gredit  of  profit  and  loss  was  $13,084,445. 

Investment  Value. 

Looking  back  over  the  operations  of  the  New  Haven,  one  of  the 
most  striking  facts  to  be  noted  was  that  after  the  consolidations 
completed  in  1898-99,  the  gross  earnings  of  the  road,  with  prac- 
tically no  change  in  mileage,  increased  $10,000,000,  or  more  than 
25%,  in  the  four  years  to  the  close  of  1903.  In  the  same  period  net 
earnings  remained  practically  stationary.  In  other  words,  apparently 
the  entire  amount  of  the  increase  in  earnings  was  absorbed  in 
increased  cost  of  operation.  When  the  items  of  the  latter  are 
examined,  it  is  found  that  there  was  no  heavy  increase  in  main- 
tenance charges,  the  principal  item  that  had  grown  being  the  cost  of 
transportation.  This  was  not  a  favorable  showing,  and  it  was 
reflected  in  the  fact  that  in  the  face  of  heavily  increased  earnings 
the  percentage  of  surplus  shown  for  the  common  stock  had  fallen  in 
1903  to  6.8%.  In  other  words,  to  pay  the  full  8%  dividend,  the 
company  had  to  reach  its  hands  into  its  previously  accumulated 
funds. 

President  Mellen  came  back  to  the  road  as  president  in  1903, 
and  in  less  than  three  years  of  his  administration  earnings  had 
increased  $5,500,000,  and  the  net  had  risen  from  $12,500,000  at  the 
close  of  1903  to  $17,000,000  at  the  close  of  1906.  This  was  not 
accomplished  through  skimpage  of  maintenance  charges,  which 
about  corresponded  to  the  increase  of  traffic,  but  was  due,  as  already 
noted,  to  decreased  cost  of  transportation.  This  is  scientific  rail- 
roading. 


NEW  YORK,  NEW  HAVEN  &  HARTFORD        499 

This  improvement,  especially  for  the  year  of  1906,  was  so 
marked  that  in  this  year  the  company  adopted  the  policy,  fortunately 
becoming  more  general  among  railway  companies,  of  having  the 
books  and  accounts  of  the  companies  examined  and  certified  by  a 
reputable  firm  of  chartered  accountants.  The  report  adds  that  in 
consequence  of  some  changes  recommended  and  adopted  in  the  keep- 
ing of  the  books,  there  has  been  a  considerable  reduction  in  the  net 
income  of  the  company  from  that  which  would  have  been  shown 
in  following  the  methods  of  making  up  the  accounts  in  previous 
years.  In  other  words,  the  improvement  over  the  preceding  years 
was  actually  rather  better  than  the  altered  system  of  accounting  in 
1906  reveals. 

It  is  somewhat  curious  to  note  that  in  the  face  of  this  handsome 
improvement  in  the  affairs  of  the  company,  the  evidence  of  a  much 
more  energetic  and  progressive  management,  the  stock  of  the  New 
Haven  has  considerably  declined.  It  sold  as  high  as  $255  a  share 
in  the  boom  of  1902.  It  still  reached  $225  in  1903 ;  but  at  the  high 
levels  of  1906,  with  the  best  showing  that  the  company  has  made  in 
recent  years,  the  highest  price  reached  was  $204  per  share.  In  the 
very  moderate  slump  of  June,  1906,  the  stock  sold  down  to  $191, 
and  in  June,  1907,  to  $159^,  which  was  $26  below  the  lowest  price 
touched  in  the  slump  of  1903-4. 

The  apprehensive  investor  in  or  holder  of  New  Haven  stock  will 
naturally  inquire  why  this  decline  should  have  taken  place.  It  was 
due  in  part,  no  doubt,  to  the  high  rates  of  money  in  1906-7,  averaging 
on  time  loans  very  nearly  6%  during  the  year.  New  Haven  is  a 
kind  of  savings  bank  stock  that  is  held  by  small  investors  for  the 
dividends  it  returns,  and  with  savings  bank  money  at  4%,  the  stock 
would  naturally  tend  to  sell  lower. 

But  the  larger  cause  of  the  decline  was  the  rapid  issue  of  new 
securities  which  always  weights  a  stock.  The  average  investor,  it 
is  certain,  dislikes  a  policy  of  aggressive  improvement  involving  the 
issue  of  new  securities,  and  this  fact  was  reflected  in  the  average 
price  of  the  New  Haven,  as  it  has  been  in  the  New  York  Central, 
the  Pennsylvania,  and  other  roads. 

The  improvements  planned  for  the  New  Haven  were  not 
completed  in  1906,  and  if  the  stock  could  decline  from  $255  to  $176 
per  share  from  1902  to  1903,  it  was  evident  that  it  would  probably 
go  considerably  below  1903  on  another  general  recession,  if  $204 
was  the  highest  price  it  could  reach  in  the  general  high  levels  of 
1906.  It  is  scarcely  possible  that  New  Haven  will  undertake  to 
increase  its  dividend  should  high  rates  of  money  prevail.    It  is  rather 


500   NEW  YORK,  NEW  HAVEN  &  HARTFORD 

doubtful,  therefore,  if  New  Haven  stock  would  tend  to  sell  above 
$200,  and  on  any  extensive  decline  in  prices  it  would  readily  decline 
to  a  5%  basis,  or  lower;  that  is  to  say,  to  around  $160  per  share. 
as  it  did.  With  the  highly  satisfactory  showing  which  the  new  ad- 
ministration of  its  affairs  has  made  it  is  certan  that  there  are  few 
solider  railway  stock  investments,  and  that  at  anything  like  these 
figures  even  the  most  cautious  will  probably  conclude  that  the 
stock  presents  an  attractive  investment. 

The  offer  of  exchange  for  Boston  &  Maine  stock  was  on  a 
basis  of  share  for  share,  that  is  to  say,  an  8%  stock  for  a  7%  stock. 
Comparison  of  the  earnings  of  the  two  roads  shows  that  the  New 
Haven's  dividend  was  on  a  much  solider  basis  than  the  Boston  & 
Maine's,  and  the  exchange  was  therefore  advantageous  to  holders 
of  the  latter  stock.  On  the  other  hand  the  results  which  should 
accrue  from  a  more  energetic  management  of  the  Boston  &  Maine 
should  fully  justify  the  New  Haven's  acquisition  of  Boston  &  Maine 
control. 


NEW  YORK,  ONTARIO  AND  WESTERN 

RAILWAY. 

The  New  York,  Ontario  and  Western  operates  a  line  from 
Cornwall  on  the  Hudson,  to  Oswego,  on  Lake  Ontario,  with  track- 
age rights  over  the  West  Shore  (New  York  Central  lines), 
from  Cornwall  to  Weehawken.  In  connection  with  the  Rome, 
Watertown  and  Ogdenshurg,  the  Grand  Trunk  and  Wabash,  it  has 
a  roundabout  through  route  from  New  York  to  Chicago.  The 
company's  most  available  asset,  however,  is  its  coal  holdings  in 
Pennsylvania,  which  it  reaches  by  a  branch  from  Cadosia  to  Scran- 
ton,  Pa. 

It  was  on  account  of  its  coal  holdings  that  the  control  of  the 
road  was  purchased  by  the  New  York  and  New  Haven  at  the  close 
of  1904,  for  a  little  over  thirteen  million  dollars.  It  is  for  the  same 
reason  that  the  road  is  to  be  ranked  as  a  "coaler." 

History. 

The  Ontario  was  organized  in  1880,  as  the  successor  of  the 
New  York  and  Oswego  Midland  Railroad.  It  owns  its  own  line 
from  Cornwall  to  Oswego,  and  the  several  branches  and  leased  lines 
bring  up  its  operated  trackage  to  546  miles.  Its  main  business  is 
distributing  coal  from  the  Pennsylvania  district. 

Ownership. 

The  New  York  and  New  Haven  holds  291,600  shares  of  com- 
mon stock,  and  22  shares  of  the  preferred  stock,  constituting  a  clear 
majority  of  both.  Out  of  its  thirteen  directors,  eight  are  from  the 
board  of  the  New  Haven,  including  President  Charles  S.  Mellen, 
and  vice-president  Charles  F.  Brooker  of  the  latter.  The  board 
also  includes  Thomas  P.  Fowler,  president,  John  B.  Kerr,  vice- 
president  and  general  counsel,  and  J.  B.  Childs,  vice-president  and 
general  manager  of  the  Ontario ;  and  Charles  S.  Whelen,  of  Phila- 
delphia. As  the  property  of  the  New  York  and  New  Haven,  the 
Ontario  has  naturally  the  same  affiliations  as  the  latter,  but  it  has 

(501) 


502  NEW  YORK,  ONTARIO  &  WESTERN 

no  extensive  holdings  of  other  roads  of  its  own.  Two  of  the  New 
Haven  directors,  J.  Pierpont  Morgan  and  William  Rockefeller,  are 
also  directors  of  the  New  York  Central.  Morgan  interests  are 
supposed  to  be  dominant  also  in  the  Erie,  which  is  the  other  chief 
competitor  of  the  Ontario. 

Capitalization. 

As  of  June  30,  1906,  the  capital  account  stood  as  follows : 

Common  stock $58,113,982 

Preferred   stock 4,000 

Total  stock $58,117,982 

Funded  debt 22,000,000 

Notes 4,025,000 

Equipment  notes 462,000 

Total   capital $84,604,982 

Rentals  capitalized  at  4% 5,112,500 

—         --■■  -  i    ^ 

Approx.   gross   capitalization $89,717,482 

Securities    held 12,767,853 

Approx.  net  capitalization $77,049,629 

Approx.  net  capit.  per  mile $141,116 

Average  miles  operated 546 

Net  earnings  on  net  capital 3.0% 

Stock  on  net  capitalization 75% 

Fixed  charges  on  total  net  income 53% 

Factor   of   Safety 47% 

It  will  be  observed  that  the  property  of  the  company  is  enor- 
mously overcapitalized,  the  estimated  net  capitalization  per  mile 
being  about  the  same  as  that  of  the  New  York  Central,  with  gross 
earnings  per  mile  nearly  double  that  of  the  Ontario.  The  net  earn- 
ings show  only  3%  on  the  estimated  net  capitalization,  which  is  just 
half  that  of  the  general  average  for  the  country.  The  larger  part 
of  this  watered  capital,  however,  is  represented  by  stock,  the  latter 
amounting  to  75%  of  the  estimated  net  capitalization.  The  bonded 
debt  of  the  road  is  not  heavy,  amounting  to  about  $40,000  per  mile. 
If  this  were  represented  by  an  equal  amount  of  stock,  the  road 
would  be  able  to  pay  fair  dividends.     As  it  is,  the  road  paid  its 


NEW  YORK,  ONTARIO  &  WESTERN  503 

first  dividend  in  1905,  from  the  surplus  accumulated  through  pre- 
vious years. 

The  Fixed  Charges  consume  a  little  over  half  of  the  available 
net  income,  leaving  a  Factor  of  Safety  for  the  underlying  securities 
of  47%. 

Equities  Owned. 

The  treasury  securities  consist  principally  of  first  and  second 
mortgages  of  the  Scranton  Coal  Company,  and  the  Elk  Hill  Coal  and 
Iron  Company,  of  a  par  value  of  about  seven  and  a  half  millions 
dollars.  The  balance  of  $12,767,853  of  securities  owned  was 
made  up  of  the  stocks  and  bonds  of  subsidiary  companies.  It  is 
through  these  coal  holdings  that  nearly  half  the  company's  gross 
earnings  are  derived. 

Increase  of  Capitalization. 

In  six  years  the  increase  of  capital  and  earnings  has  been  as 
follows : 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt               Total 

Gross 

1906 

58,113,982 

$4,000 
4,000 

$15,437,000   $73,554,983      $4,963,483 
22,000,000     80,117,982j      7,265,057 

Net  increase  over  six  years :  Nominal  capital,  10% ;  Gross 
earnings,  46%. 

Character  of  Traffic. 

Of  the  $5,899,000  of  freight  earnings  in  1906,  $3,070,000  were 
derived  from  the  transportation  of  coal.  Another  large  item  was 
the  haulage  of  milk  which  brought  in  $688,000.  These  two  items 
constitute  an  even  half  of  the  gross  earnings.  The  passenger  traffic 
represented  less  than  20%  of  the  total. 

Stability  of  Earnings. 

Mileage  and  earnings  through  a  series  of  years  have  compared 
as  follows : 


Year 

Miles  Operated           Gross  Earnings 

Per  Mile 

1895-6 

480 
480 
480 
480 
480 
480 
480 
548 
54S 
548 
546 

$3,779,336 
3,894,403 
3,914,635 
4,346,163 
4,963,483 
5,322,884 
5,456,696 
6,176,518 
6,652,484 
7,090,889 
7,265,057 

$7,927 

1896-7 

8,105 

1897-8 

8,148 

1898-9 

9,046 

1899-0 

10,331 

1900-1 

1901-2 

11,079 
11,357 

1902-3 

11,263 

1903-4 

12,137 

1904-5 

12,930 

1905-6 

13,3(9 

504 


NEW  YORK,  ONTARIO  &  WESTERN 


It  will  be  seen  that  in  ten  years  the  gross  earnings  per  mile 
have  increased  by  over  60%,  and  this  increase  has  been  steady  with 
practically  no  setback  from  year  to  year.  This,  in  the  face  of  the 
coal  troubles,  is  a  very  satisfactory  showing". 

Maintenance. 

For  a  number  of  years  the  company  has  pursued  a  policy  of  a 
very  liberal  appropriation  for  the  maintenance  of  the  road.  In  a 
very  satisfactory  report  presented  by  the  company,  the  items  of 
maintenance  are  shown  in  extreme  detail,  with  a  demonstration  that 
they  have  been  more  than  adequate  for  the  proper  conduct  of  the 
road.  For  example,  the  allowance  for  repairs  of  engines  for  the 
year  1906  amounted  to  $2,568  per  engine,  as  against  an  allowance 
of  $1,372  per  engine  in  1897.  Correspondingly,  the  maintenance 
per  freight  car  amounted  to  $71  for  the  year  1906,  as  against  $34 
in  the  years  1897  and  1898.  In  other  words,  while  traffic  density 
has  not  very  heavily  increased,  these  two  charges  for  maintenance 
have  been  doubled.  It  seems  fair  to  assume,  therefore,  that 
there  has  latterly  at  least  been  a  surcharge  in  these  items,  and  that 
in  years  of  necessity  the  maintenance  might  be  curtailed  somewhat 
without  detriment  to  the  road.  •  For  six  years  the  charges  compare 
as  follows : 


Maintenance  Der  Mile 

Year 

Traffic  Density 

Way 

Equipment 

Total 

1901-2 

1,128,728 

$1,863 

$1,556 

$3,419 

1902-3 

1,059,135 

1,689 

1,517 

3,206 

J903-4 

1,151,312 

1,829 

1,716 

3,545 

1904-5 

1,268,484 

1,510 

1,818 

3,328 

" 905-6 

1,211,812 

1,631 

2,023 

3,657 

... 

1,163,894 

$1,705 

$1,726 

$3,434 

-Average 
Mil 


^ain  track,  113. 


es  <*  extra  . 


^7 


1,845 
2,741 


2,S90 
3,169 


4,735 
5,910 


^096,289 

[n  1902-3  4  h  ^~~ 

'  nie  amoMnf  „...  ai  leg-i 


am0UW  e*Pended;nXns  ***  °* 


were  applied  to  the  double- 
'■*   Hudson  to   Cadosia, 
TTo  to  June  30th, 
*  ^3^000. 

°J2     tlL 


While 


-».  *££ -**,. 


/'a'arge  part  0{         <y  through  ten  year,  , 

""■  *«  absorbed  by  '  *Ve  ''" 


«  e-xPenses.  ,?„„ 


NEW  YORK,  ONTARIO  &  WESTERN 


505 


in  large  part  to  the  policy  of  heavy  maintenance.  The  net  earnings 
per  mile  of  road  operated  increased  from  $2,318  for  the  year  of 
1897,  to  $3,722  for  the  year  of  1906.  The  result  of  this  was  to  in- 
crease the  surplus  earnings  shown  from  $832  per  mile  to  $2,175  per 
mile. 

For  six  years  the  items  have  compared  as  follows : 


Year 


Per  cent. 

Dividends 

Surplus 

Earned  on 

Paid  on 

Average 

Common 

Common 

Price 

879,233 

1.5 

— 

32 

658,959 

1.1 

— 

32 

860,972 

1.4 

31 

886,929 

1.5 

— 

29 

1,281,277 

2.2 

44 

33 

1,187,500 

2.0 

2 

52 

1900-1 . 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1905-6. 


This  would  have  been  a  very  satisfactory  showing  if  it  had  not 
been  for  the  amount  of  watered  capital.  The  surplus  shown  touched 
high  water  mark  in  the  year  of  1905,  but  even  then  it  represented 
only  2.2%  on  the  capital  stock  of  the  company.  This  was  insufficient 
to  pay  any  dividends  except  from  the  accumulation  of  surplus,  as 
was  done  in  1905.  In  that  year  a  dividend  of  3%  from  surplus 
was  declared,  payable  Jan.  1,  1905,  and  1^2%  was  paid  in  the  July 
following.  In  1906  a  dividend  of  2%  on  the  common  stock  was 
declared. 

The  Balance  Sheet. 

On  June  30,  1906, 

The  current  assets  showed $3,344,137 

Current  liabilities 2,642,372 

Leaving  a  credit  balance  of $701,765 

The  amount  of  cash  on  hand  was  $1,130,416.  The  Profit  and 
Loss  surplus  was  small,  amounting  at  the  close  of  1906  to  $4,907,960. 

Investment  Value. 

In  a  careful,  conservative  way,  the  Ontario  has  been  admirably 
managed,  and  has  an  enviable  record.  In  twenty  years  its  gross 
earnings  per  mile  have  increased  by  more  than  three  times,  and  its 
net  earnings  per  mile  nearly  five  times.  The  surplus  from  opera- 
tion was  $160  per  mile  in  1887.  It  was  over  $2,000  per  mile  in 
1905-6.  This  gain  has  been  slow  from  year  to  year,  due  to  the 
steady  growth  of  the  territory  controlled  by  the  company.     It  may 


506  NEW  YORK,  ONTARIO  &  WESTERN 

scared)  be  doubted  that  under  the  new  ownership  this  excellent 
management  will  be  continued,  and  as  the  growth  of  business  should 
also  continue  the  slock  of  the  Ontario  should  in  time  prove  an 
excellent  investment.  Now  that  the  road  has  been  taken  over  by 
the  New  Haven,  it  ought  to  do  better  perhaps  than  in  the  past. 
It  provides  a  fairly  direct  line  from  the  heart  of  the  coal  regions  to 
all  of  lower  New  England  without  passing  by  New  York.  The  New 
Haven  has  been  double-tracking  and  bringing  up  to  a  high  standard 
of  efficiency  its  Central  New  England  Railway,  which  crosses  the 
Hudson  by  the  Poughkeepsie  Bridge,  and  meets  the  main  line  of  the 
Ontario  at  Campbell  Hall,  N.  Y.  A  spur  of  the  Ontario  also 
reaches  to  Kingston  while  another  spur  of  the  Central  New  Eng- 
land reaches  Rhineclift  on  the  opposite  side  of  the  river. 

With  this  new  connection  the  earnings  of  the  Ontario  ought  to 
show  a  steady  increase,  certainly  not  falling  below  that  of  recent 
years,  even  though  the  country  in  general  should  not  be  so  pros- 
perous. 

It  is  not  improbable  that  an  endeavor  will  be  made  to  maintain 
the  2%  dividend  declared  for  the  year  1905-6.  Such  a  dividend 
will  just  meet  the  interest  charges  on  the  New  Haven's  debenture 
bonds  issued  to  cover  the  purchase  price  of  the  Ontario.  The  pol- 
icy of  the  New  Haven  has  been  that  of  a  very  liberal  maintenance, 
and  the  disbursement  of  practically  all  the  surplus  remaining  in 
dividends.  If  this  policy  be  pursued,  the  shareholders  of  the  On- 
tario may  regard  their  2%  dividend  as  fairly  safe  under  prosperous 
conditions,  the  absence  of  strikes  and  the  like. 

On  this  basis,  with  money  at  4%,  the  stock  is  reasonably  worth 
from  $40  to  $50  per  share.  The  price  paid  by  the  New  Haven, 
with  the  3%  disbursement  of  surplus  deducted,  averaged  $45  per 
share.  The  price  was  run  up  to  $64  per  share  in  1905  in  anticipa- 
tion of  the  3%  dividend  declared  that  year  from  accumulated  sur- 
plus. It  sold  down  to  $42  per  share  in  the  very  moderate  slump  of 
May,  1906,  and  to  $32  in  May,  1907.  Under  any  considerable 
decline  in  railway  values  the  stock  might  go  considerably  lower  than 
this.  On  the  other  hand,  "low  priced"  shares  seem  to  have  a  great 
attraction  for  certain  types  of  investors,  though  the  word  price  has 
reference  merely  to  the  bare  price,  and  not  to  values.  The  Ontario 
has  been  one  of  the  numerous  "low  priced"  stocks  which  have  been 
extensively  manipulated  in  the  past,  its  stock  selling  down  to  $19 
per  share  in  1903  and  in  1904,  with  every  whit  as  good  prospects 


NEW  YORK,  ONTARIO  &  WESTERN  507 

as  it  had  at  $40  per  share  in  1901.  Now  that  control  has  definitely 
passed  to  the  New  Haven,  the  floating-  stock  has  no  value  to  other 
roads. 

Looking  at  the  record  of  the  company,  the  cautious  investor 
will  probably  conclude  that  the  stock  would  be  a  very  good  pur- 
chase at  $40,  still  better  at  $30  per  share,  and  perhaps  a  good  thing 
to  let  go  of,  when  it  bad  risen  to  above  $50  or  $6C  per  share. 


NEW   YORK,  SUSQUEHANNA  AND  WESTERN 

RAILROAD. 

(Controlled  by  the  Erie  Rd.) 

The  New  York,  Susquehanna  and  Western  operates  a  small  road 
extending  from  Jersey  City  to  Wilkesbarre,  Pa.,  with  a  branch  from 
Longwood  to  Middletown,  N.  Y.  The  total  mileage  operated  is 
238  miles,  with  25  miles  of  double  track. 

In  1906  the  gross  earnings  on  all  accounts  were  $2,757,925. 
This  was  about  the  same  as  the  gross  earnings  for  the  previous 
year.  Operating  expenses  slightly  increased,  however,  but  this  in- 
crease was  general  and  not  due  to  any  increase  in  the  maintenance 
charges.  As  a  result  of  the  operations  for  the  year  the  road  showed 
a  deficit  of  $24,332.  In  addition  to  this  there  were  expended  for 
improvements  $114,380,  making  the  total  deficit  for  the  year 
$138,713.    This  was  after  sinking  fund  payments  of  $52,940. 

The  interest  on  the  funded  debt  has  consumed  practically  all 
the  surplus  over  operating  charges. 

The  road  has  a  capital  of 

Common  stock $13,000,000 

Preferred  stock 13,000,000 

Total $26,000,000 

Bonded  debt,  including  leased  lines 15,668,000 

Total $41,668,000 

This  is  equivalent  to  $175,000  per  mile,  which  is  enormous 
capitalization  for  a  road  with  gross  earnings  of  only  $11,000  per 
mile. 

No  dividends  have  been  paid  on  the  stock  since  1892.  Practi- 
cally all  of  the  stock  was  exchanged  for  Erie  stock  in  1898,  and 
there  is  very  little  of  it  outstanding. 

The  road  is  obviously  regarded  as  of  value  to  the  Erie  or  its 
purchase  would  not  have  been  made.     It  is,  therefore,  probable  that 

(508) 


NEW  YORK,  SUSQUEHANNA  &  WESTERN        509 

no  default  would  occur  on  its  interest  obligations  should  the  deficit 
of  its  earnings  continue.     In  1905  the  road  showed  a  net  surplus, 
after  sinking  fund  payments  of  $92,515,  and  at  the  close  of  the. 
fiscal  year  of  1906  after  the  payment  of  the  deficit,  there  remained 
a  net  credit  to  Profit  and  Loss  of  $1,101,704. 

The  total  maintenance  for  the  year  amounted  to  $2,663  per  mile, 
which  was  a  slight  increase  over  1905.  These  figures  are  probably 
adequate  without  being  excessive. 

The  Erie's  equity  in  this  road  probably  represents  nothing  more 
than  the  advantages  of  having  the  road  under  its  control. 


NORFOLK   AND  WESTERN  RAILWAY. 

The  Norfolk  and  Western  was  one  of  the  important  "soft 
coalers,"  which  in  1901  was  gathered  into  the  Community  of  Inter- 
est plan.  In  that  year  practical  control  was  acquired  by  the  Penn- 
sylvania, and  since  that  time  it  has  shown  a  very  remarkable  pros- 
perity. 

The  history  of  the  road  dates  back  to  1851,  when  the  Norfolk 
and  Petersburg  became  one  of  several  roads  controlled  and  in  part 
owned  by  the  State  of  Virginia,  and  afterwards  consolidated  into 
the  Atlantic,  Mississippi  and  Ohio  Railroad.  The  latter  fell  into 
the  hands  of  a  receiver  and  in  1880  was  reorganized  as  the  Norfolk 
and  Western  Railroad,  of  which  the  present  Norfolk  and  Western 
Railway  represents  a  reorganization  which  took  place  in  1896. 

The  company  operates  a  fine  freight  line,  part  of  it  double- 
tracked,  from  Norfolk  westward  through  the  rich  coal  fields  of  West 
Virginia  to  Cincinnati  and  Columbus,  Ohio,  with  an  important 
branch  extending  up  the  Shenandoah  Valley  to  Hagerstown,  Md. 
The  operated  mileage  of  1906  was  1,853  miles. 

Ownership. 

Control  of  the  road  was  insured  to  the  Pennsylvania  through 
the  ownership  of  $33,000,000  of  the  $89,000,000  of  the  capital  stock 
of  the  road,  held  as  follows : 

Preferred.  Common. 

Pennsylvania  R.  R $5,500,000  $20,330,000 

Pennsylvania  Co 5,000,000  1,500,000 

Northern  Central  Railway          500,000  1,000,000 


$11,000,000        $22,830,000 

In  September,  1906,  il  was  announced  that  the  Pennsylvania 
had  disposed  of  approximately  one-half  of  its  holdings,  along  with 
a  similar  proportion  of  its  Baltimore  &  Ohio  stock,  and  all  of  its 
holdings  in  the  Chesapeake  &  Ohio. 

(510) 


NORFOLK  &  WESTERN  511 

As  of  December  31,  1906,  the  Pennsylvania  Railroad  held 
only  $6,246,000  of  the  Norfolk  &  Western  common  and  $3,246,000 
of  the  preferred.  That  is  to  say,  the  Pennsylvania,  proper,  reduced 
its  Norfolk  &  Western  holdings  by  about  $16,000,000. 

The  sale  was  made  to  Kuhn,  Loeb  &  Co.,  Bankers,  New  York, 
presumably  for  the  eventual  transfer  to  some  other  interest.  This 
banking  firm  is  very  closely  associated  with  the  Harriman-Frick- 
Rogers  interests  in  the  Union  Pacific  and  other  roads,  and  in  view 
of  the  Union  Pacific's  purchase  of  a  half  of  the  Pennsylvania's 
holdings  in  Baltimore  &  Ohio,  it  was  assumed  that  both  this  Norfolk 
&  Western  stock  and  the  Pennsylvania's  holdings  of  Chesapeake  & 
Ohio  might  find  their  way  into  the  same  hands,  this  probability 
being  accentuated  by  the  fact  that  H.  H.  Rogers  is  building  the 
Deepwater  &  Tidewater  Railway,  paralleling  both  the  Norfolk  & 
Western  and  the  Chesapeake  &  Ohio  into  the  coal  fields  of  West 
Virginia. 

The  sale  of  the  Pennsylvania's  holdings,  however,  brought  no 
immediate  change  in  the  directorate  of  the  road,  which,  in  1905-6, 
included  J.  B.  Thayer,  Samuel  Rea  and  J.  P.  Green,  vice- 
presidents,  and  W.  H.  Barnes,  director,  of  the  Pennsylvania,  and 
James  McCrea,  then  vice-president  of  the  Pennsylvania  Company ; 
Henry  Fink,  chairman,  L.  E.  Johnson,  president,  William  G.  Mac- 
dowell,  vice-president,  and  Joseph  I.  Doran,  general  solicitor,  of 
the  Norfolk  &  Western ;  Victor  Morawetz,  chairman  of  the  board 
of  directors  of  the  Atchison  Railway,  and  William  H.  Taylor,  of 
Norfolk,  Va.  Perhaps  in  consequence  of  a  government  investiga- 
tion, two  of  the  Pennsylvania  representatives,  John  B.  Thayer  and 
William  H.  Barnes,  resigned  from  the  board  in  1906,  and  H.  C. 
Frick  and  Levi  C.  Weir  were  elected  in  their  stead. 

Mr.  Frick  is  credited  with  being  one  of  the  largest  single 
shareholders  in  the  road  and  also  in  the  Reading.  He  is  a  director  in 
the  Pennsylvania,  Reading,  Union  Pacific,  Chicago  and  North- 
western, Atchison  and  other  lines,  and  by  virtue  of  his  extensive 
holdings  has  recently  become  one  of  the  potent  figures  in  the 
control  of  American  railroads.  Mr.  Weir  is  president  of  the  Adams 
Express  Company,  a  director  in  the  Iowa  Central,  Minneapolis  and 
St.  Louis,  and  other  roads. 

The  affiliations  of  the  Norfolk  and  Western  have  been  naturally 
those  of  the  Pennsylvania  Railroad,  and  as  its  nearest  competitor, 
the  Chesapeake  &  Ohio,  was  jointly  controlled  by  the  Pennsylvania 


512  NORFOLK  &  WESTERN 

and  New  York  Central,  competition  in  this  field  has  naturall}  been 
all  but  eliminated. 

Capitalization. 

As  of  June  30,  1906,  the  capital  account,  including  $8,900  of 
preferred  and  $1,530,800  common  stock,  held  in  treasury,  stood  as 
follows : 

Common  stock $66,000,000 

Preferred  stock 23,000,000 

Total $89,000,000 

Funded   debt 80,689,500 

Car  Trusts 9,400,000 

Total    capital $179,089,500 

Average  capitalization  per  mile $96,108 

Miles    operated 1,853 

Net  earnings  on  net  capital 6.4% 

Stock  on  net  capital 52% 


Fixed  charges  on  total  net  income 37% 


'O 


Factor  of  Safety 63% 

The  company  owns  practically  all  its  lines,  so  that  the  item  of 
rentals  paid  is  not  considered  in  the  estimate  of  capitalization,  and 
on  the  other  hand  the  amount  of  securities  held  is  small ;  the  one 
item  about  offsetting  the  other.  The  capitalization  per  mile  is 
rather  high,  as  is  generally  characteristic  of  reorganized  roads,  its 
$96,000  per  mile  comparing  with  $77,142  per  mile  for  the  Chesa- 
peake and  Ohio,  and  $97,241  for  the  Baltimore  and  Ohio. 

The  net  earnings  on  the  net  capital  showed  a  respectable  figure 
of  6.7%,  comparing  with  7.0%  for  the  Chesapeake  and  Ohio  and 
7.1%  for  the  Baltimore  and  Ohio. 

The  capitalization  of  the  company  is  well  arranged,  the  stock 
amounting  to  about  half,  Fixed  Charges  consuming  only  37% 
of  the  total  nel  income.  This  leaves  an  estimated  margin  of  safety 
for  the  bonds  of  63%. 

The  amount  of  preferred  stock  is  not  large,  and  the  payment 
of  4%  on  that  stock  consumes  only  $920,000,  which  requires  less 
than  an  additional  10%  of  the  total  net  income,  so  that  the  margin 
of  safety  on  the  preferred  payments  is  on  this  basis  more  than 
50%. 


NORFOLK  &  WESTERN  513 

Norfolk  and  Western  holdings  in  other  companies  are  not 
extensive,  the  chief  item  being  the  entire  capital  stock  of  the  Poca- 
hontas Coal  Company,  $1,000,000,  acquired  in  1901.  Towards  the 
development  of  this  company's  property,  the  Norfolk  and  Western 
assumed  equal  responsibilities  with  the  Coal  Company  in  the  issue 
of  $20,000,000  4%  Purchase  money  bonds,  due  1941,  the  railway 
practically  guaranteeing  both  principal  and  interest.  In  1906,  a 
sinking  fund  was  begun  for  the  retirement  of  these  bonds.  Mean- 
while the  Norfolk  and  Western  and  the  Pennsylvania  lines  west  of 
Pittsburg  (Pennsylvania  Company,  etc.),  agreed  to  make  good 
deficiencies  in  the  interest  payments,  two-thirds  of  which  was  to  be 
made  by  the  Norfolk  and  Western.  In  the  favorable  years  since 
this  agreement  was  made,  the  Norfolk  and  Western  has  advanced 
to  the  Coal  Company  $1,020,000  and  in  addition  thereto,  $800,000 
in  cash  for  the  purchase  of  additional  real  estate.  The  railway's 
interest  in  the  company,  therefore,  has  so  far  represented  a  small 
annual  loss,  but  it  is  expected  that  in  time  the  royalties  received  by 
the  coal  company  will  be  more  than  sufficient  to  pay  the  interest  on 
the  bonds  and  the  sinking  fund  requirements,  and  meanwhile  the 
company  has  direct  control  of  an  important  source  of  tonnage. 

Increase  of  Capitalization. 

In  the  six  years  from  1900,  the  company's  capital  has  increased 
$30,600,000,  or  22%,  while  the  gross  earnings  have  increased  102%. 
This  is  a  remarkable  record.     The  items  compare  as  follows : 


Year 

1899-0. 
1905-6. 


Common 
Stock 


Preferred         Funded 
Stock  Debt  Total 


Gross 
Earnings 


$66,000,000  $23,000,000   $49,099,500  $138,099,500  $14,091,004 
66,000,000     23,000,000     80,689,500      169,685,500     28,487,766 


At  the  close  of  1906,  $34,000,000  of  new  convertible  4%  bonds 
were  issued,  convertible  into  common  stock  at  par. 

Character  of  Traffic. 

The  largest  single  item  in  the  tonnage  of  the  road  is  bituminous 
coal  and  this,  with  coke,  amounts  to  about  60%  of  the  total  tonnage. 
The  company  does  not  separately  itemize  its  freight  earnings,  but 
these  in  1906  comprised  over  85%  of  the  gross  earnings.  The 
passenger  traffic  amounted  to  only  about  13%.  It  will  be  seen 
88 


44 


NORFOLK  &  WESTERN 


therefore,  that  it  is   chiefly  a  freight  road  and  derives   the  larger 
part  of  its  earnings  from  the  carriage  of  coal. 

Stability  of  Earnings. 

Since  the  reorganization  in  1896  the  gross  earnings  have 
mounted  steadily,  increasing  from  between  ten  and  eleven  million 
dollars  to  above  twenty-eight  million  dollars,  or  nearly  180%.  The 
mileage  has  not  greatly  increased,  so  that  the  earnings  per  mile 
have  risen  correspondingly,  as  the  following  table  shows : 


Year 

Miles  Operated           Gross  Earnings 

Per  Mile 

1895-6 

1,570                       $10,908,851 
1,560                          10,537,723 
1,565                          11,236,123 
1,555                          11,827,139 
1,552                          14,091,005 
1,560                          15,785,442 
1,677                          17,552,205 
1,713                         21,160,675 
1,723                         22,800,991 
1,799                         24,089,260 
1,853                        28,487,766 

$6,946 

1896-7 

6,755 

1897-8 

7,179 

1898-9 

7,605 

1899-0 

9,079 

1900-1 

10,118 

1901-2 

10,466 

1902-3 

12,353 

1903-4 

13,233 

1904-5 

13,390 

1905-6 

15,373 

Maintenance. 

Apparently  the  Norfolk  and  Western  has  been  maintained  very 
liberally,  especially  within  the  last  three  years,  and  more  particu- 
larly so  in  1906,  when  the  total  expenditures  per  mil'e  amounted 
to  $4,420. 

The  charges  for  equipment  amounted  to  $2,202  per  locomotive, 
$628  per  passenger  car  and  $53  per  freight  car.  This  was  equally 
liberal,  but  in  view  of  the  increase  in  the  average  freight  car 
capacity,  during  the  last  three  years,  the  average  maintenance  was 
not  perhaps  above  that  of  the  Pennsylvania  standard.  The  items 
through  a  series  of  years  were  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

1,836,135 
1,879,494 
2,124,743 
2,223,328 
2,373,674 
2,704,515 

$1,266 
1,271 
1,608 
1,660 
1,721 
1,856 

$1,460 
1,392 
1,775 
2,050 
2,177 
2,564 

$2,726 
2,663 
3,383 
3,710 
3,898 
4,420 

Average.  . .  . 

2,190,314 

$1,563 

$1,903 

$3,466 

Miles  of  extra  main  track,  185. 


NORFOLK  &  WESTERN 


515 


C.  &0. 
B.  &  0. 
Penn. . . 
Erie 


2,057,510 
2,282,704 
3,862,125 
2,764,827 


1,387 
1,876 
3,648 
1,861 


1,995 
2,416 
4,983 
3,216 


3,382 
4,292 
8,631 
5,077 


The  train  tonnage  of  the  road  is  high,  amounting  in  1906  to 
580  tons  per  train,  and  this  has  necessitated  a  great  deal  of  recon- 
struction, the  conversion  of  wooden  bridges  into  steel  trestles,  the 
enlargement  of  stations,  etc.  The  outlay  for  the  year  of  1906,  in- 
cluded the  relaying  of  82  miles  with  heavier  rails,  considerable  im- 
provement of  tunnels,  etc.  This  maintenance  was  certainly  ade- 
quate, though  it  may  not  have  been  excessive. 

Improvements. 
Over  and  above  the  improvements  directly  charged  to  main- 
tenance, the  company  has  annually  set  aside  considerable  sums  for 
a  betterment  fund,  amounting  in  the  last  six  years  to  $15,200,000, 
as  follows : 

Paid  on  Norfolk  & 
Western-Poco- 
Year.  Betterments,    hontas  Joint  Bonds. 

1899-0 $1,500,000 


1900-1 . 
1901-2. 
1902-3. 
1903-4. 
1904-5 . 
1905-6. 


1,500,000 
2,500,000 
2,500,000 
2,000,000 
2.250,000 
2,950,000 


Totals $15,200,000 


$161,230 
159,176 
295,595 
216,000 
188,000 

$1,020,001 


In  its  annual  report  the  company  states  that  from  the  time 
of  its  reorganization  to  June  30,  1906,  the  company  has  expended 
for  betterments  a  total  of  $41,000,000,  of  which  $18,793,000  has 
been  met  from  surplus  income.  This  on  the  present  mileage  means 
about  $10,000  per  mile  for  the  ten  years. 

Car  Trusts. 

In  addition  to  the  amounts  devoted  I"  improvements  stated 
above,  the  company,  following  in  this  regard  the  general  Penn- 
sylvania policy,  has  created  car  trusts,  for  the  purpose  of  equip- 
ment, amounting  to  $12,514,000.  Of  these  Car  Trust  certificates, 
there  were,  on  June  30,   1906,  $9,400,000  outstanding. 


516 


NORFOLK  &  WESTERN 


Surplus  Earnings. 

In  seven  years  the  surplus  available  for  improvements  and 
dividends  has  mure  than  doubled,  leaving  in  each  year  of  this 
period  a  surplus  available  for  the  common  stock  as  follows : 


Dividends 

Per  cent. 

Dividends 

Year 

Surplus 

Paid  on 

Earned  on 

Paid  on 

Average 

Preferred 

Common 

Common 

Price 

1899-0.  .  . 

$3,389,832 

4 

3.8 

29 

1900-1.  .  . 

4,157,831 

4 

5. 

44 

1901-2.  .  . 

5,123,095 

4 

6.5 

2 

56 

1902-3.  .  . 

6,040,189 

4 

7.9 

2* 

64 

1903-4.  .  . 

5,819,302 

4 

7.6 

3 

63 

1904-5.  .  . 

5,833,454 

4 

7.6 

n 

83 

1905-6.  .  . 

7,452,374 

1      4 

9.6 

4 

88 

Dividend  Record. 
The  dividend  record  for  twenty-three  years  is  as  follows: 

Year.  Preferred.  Common. 

1883 4 

1884 Sl/2   (scrip.) 

1888 \y2 

1889-91 3 

1892 \l/2  (and  1%  scrip.) 

(Receivership.) 

1897  (new  company) 1 

1898 3 

1899-00 4 

1901 4  2 

1902 4  2y2 

1903-4 4  3 

1905 4  sy 

1906 4  5 

Since  the  reorganization  in  1899  the  company  has  always  paid 
the  full  4%  on  the  preferred  stock.  In  1901.  dividends  were  begun 
on  the  common,  and  the  earnings  for  190')  were  so  favorable  that 
the  dividend  on  the  common  stock  was  increased  to  5%. 

The  Balance   Sheet. 

Excluding  materials  and  supplies,  advances  to  subsidiary  com- 
panies, etc.,  the  general  balance  of  June  30,  1906,  showed: 


NORFOLK  &  WESTERN  517 

Current  assets $6,353,1 1 1 

Current  liabilities 4,605,695 

Leaving  a  balance  of $1,747,416 

The  item  of  cash  in  hand  was  $4,151,422,  and  the  credit  to 
Profit  and  Loss  was  $3,800,853. 

Investment  Value. 

The  preferred  stock  of  the  Norfolk  and  Western  has,  at  least 
within  recent  years,  had  a  comfortable  margin  of  safety,  and  can 
be  looked  upon  as  a  solid  security*  of  its  class.  Its  4%  is  non- 
cumulative  and  limited,  so  that  with  money  ruling  at  4%  it  is 
entitled  to  sell  around  $90  to  $100  per  share.  As  a  matter  of  fact 
it  has  never  yet  sold  at  par,  the  highest  quotation  being  $96,  reached 
in  1905-6.  In  the  slump  of  1903-4,  it  went  down  to  $51,  and  in 
the  very  moderate  decline  of  1906  to  $90.  At  the  latter  figure  its 
yield  is  4.4%. 

The  highest  reached  by  the  common  stock  in  1902  was  $80 
per  share  and  it  sold  off  to  $53  in  1903-4,  rising  again  to  $97  in 
1906,  on  increase  of  dividend  to  a  5%  basis. 

The  issue  at  the  close  of  1906  of  $34,000,000  par  value,  of  bonds, 
convertible  at  par  into  common  stock,  introduced  a  new  element 
into  the  prospective  price  of  the  common  stock,  for  it  is  evident 
that  even  under  a  still  further  increase  of  dividends  the  stock 
could  not  advance  materially  beyond  par  until  the  conversion  was 
complete.  This  would  add  50%  to  the  amount  of  common  stock 
outstanding,  raising  the  total  to  $100,000,000. 

Another  matter  that  may  materially  affect  the  value  of  Norfolk 
&  Western  securities  is  the  construction  of  the  Deepwater  &  Tide- 
water Railway,  which  is  to  parallel  the  Norfolk  and  reach  into  the 
same  coal  fields.  It  is  stated  that  this  road  is  being  built  by  H. 
H.  Rogers  of  the  Standard  Oil  Co.,  and  was  undertaken  because  Mr. 
Rogers  was  unable  to  obtain  from  the  Norfolk  &  Western  a  rate 
satisfactory  to  him,  for  the  carriage  of  coal  from  his  extensive 
holdings  in  coal  lands  in  West  Virginia.  If  control  of  the  Norfolk 
&  Western  should  eventually  pass  into  hands  friendly  to  Mr. 
Rogers,  it  might  readily  be  that  the  new  line  would  be  taken  over 
by  the  Norfolk  &  Western.  But  such  a  purchase  could  hardly  be 
regarded  by  the  stockholders  with  great  favor.  It  would  add  no 
new  territory  and  only  new  track,  and  past  experience  would  sug- 
gest the  probability  that  the  price  paid  for  the  new  line  would  be 


518  NORFOLK  &  WESTERN 

heavy.  It  is  obvious  that  almost  any  price  it  would  pay  would  be 
several  times  more  than  the  cost  of  double  tracking  of  the  Norfolk 
&  Western  throughout  its  entire  length. 

On  the  other  hand,  should  the  Tidewater  road  remain  inde- 
pendent, it  might  prove  a  very  interesting  competitor,  alike  for  the 
Norfolk  &  Western  and  the  Chesapeake  &  Ohio.  The  interests 
behind  the  new  road  are  not  inexperienced,  and  it  is  being  built 
to  carry  freight  at  the  lowest  possible  cost. 

On  a  5%  basis,  with  a  fair  prospect  of  steadily  increasing 
earnings,  a  corresponding  increase  in  the  available  surplus,  and 
not  improbably  a  still  further  raise  in  the  dividend,  Norfolk  & 
Western  in  times  of  normal  money  should  tend  to  sell  well  towards 
par,  or  somewhat  above.  Obviously  with  its  earnings  so  largely 
dependent  upon  a  single  industry,  and  that  industry  the  carriage 
of  coal,  it  would  tend  to  sell  rather  below  other  5%  stocks  with 
similar  prospects,  but  on  a  broader  basis  of  security.  In  the  heavy 
slump  of  March,  1907,  the  stock  sold  down  to  $71  per  share.  At 
any  such  figures  it  would  appear  to  be  an  extremely  attractive 
purchase. 

With  a  large  probability  of  the  maintenance  of  rates,  the  in- 
vestor in  Norfolk  &  Western  would  consider  simply  the  prospective 
conditions  in  the  coal  industry,  and  incidentally  that  of  the  country 
at  large.  The  capital  issues  of  the  company  have  been  profitably 
employed  heretofore,  and  there  is  no  reason  to  suppose  that  money 
derived  from  the  issue  of  new  bonds  will  not  be  put  to  equally  good 
use. 


NORTHERN  CENTRAL  RAILWAY. 

The  Northern  Central  Railway  is  a  back-country  line,  own- 
ing a  road  from  Baltimore  to  Harrisburg  and  Sunbury,  in  Penn- 
sylvania, and  operating  thence  by  leases  and  contracts  northward 
through  Williamsport  to  Sodus  Point,  on  Lake  Ontario.  The 
majority  of  its  stock  (in  1906,  $9,401,950,  par  value)  is  owned  by 
the  Pennsylvania,  and  Pennsylvania  representatives  constitute 
a  majority  of  the  board.  The  other  directors  of  1906  were:  H. 
Walters  and  J.  D.  Cameron,  of  New  York ;  Luther  S.  Bent,  Wayne 
MaeVeagh  and  A.  Loudon  Snowden,  of  Philadelphia,  and  Michael 
Jenkins,  of  Baltimore. 

The  road  is  officered  by  the  Pennsylvania  forces.  In  1906 
it  operated  462  miles  of  main  road,  and  about  half  its  freight 
tonnage  was  coal. 

Aside  from  some  stocks  in  associated  or  subsidiary  lines, 
the  Northern  Central,  on  January  1st,  1907,  owned  $1,000,000  par 
value  of  Baltimore  and  Ohio  preferred  and  $1,048,700  common  ; 
likewise  $500,000  of  Norfolk  and  Western  preferred,  and  $1,000,- 
000  common.  During  1906  the  company's  holding  of  Chesapeake 
&  Ohio  common  stock,  $1,500,000,  par  value,  was  sold. 

Capitalization. 

At  the  close  of  1906  a  stock  dividend  of  12^%  was  declared 
and  charged  to  profit  and  loss.  Including  this  amount,  on  which 
no  dividends  were  paid  during  1906,  the  capital  account,  January 
1st,  1907,  stood  as  follows : 

Common  stock  $17,193,400 

Stock   dividend 2,149,168 

Total   stock $19,342,568 

Funded    debt 6,942,528 

Car   trusts 813,755 

Total  Capital $27,098,851 

(519) 


520  NORTHERN  CENTRAL 

Rentals  capitalized  at  4% 11,780,000 


Approx.  gross   capitalization $38,878,851 

Securities  held 6,634,987 


Approx.  net  capitalization $32,243,864 

Approx.  net  capital,  per  mile $69,791 

Average  miles  operated 462 

Net  earnings  on  net  capital 7.0% 

Stock  on  net  capitalization 55% 

Fixed  charges  on  total  net  income 28% 

Factor   of   Safety 72% 

It  will  be  seen  that  the  estimated  net  capitalization  is 
rather  high  and  that  the  net  earnings  on  this  capitalization  repre- 
sented 7%. 

Fixed  charges  were  very  low,  amounting  to  only  28%  for 
1906,  leaving  a  large  factor  of  safety  for  the  underlying  securities. 
In  1906  the  company  owned  stocks  and  bonds  to  a  par  value 
of  $9,572,000,  of  which  the  larger  amount,  aside  from  the  hold- 
ings of  Baltimore  &  Ohio  and  Norfolk  &  Western  stock  already 
noted,  was  of  subsidiary  lines. 

Since  1900  the  nominal  capital  increase  has  been  small,  while 
in  the  meantime  gross  earnings  have  increased  by  nearly  one- 
half,  as  follows: 


Year 

Common 
Stock 

Funded 
Debt 

Total 
Capital 

Gross 
Earnings 

1900 

$11,462,400 
17,193,400 

$9,578,000 
6,942,528 

$21,040,400     $7,845,412 

1906 

24  135,928 

11,632,633 

Net  increase  over  six  years:  Nominal  capital,  15%;  gross  earnings,  48% 

Stability  of  Earnings. 
The  gross  earnings  have  shown  a  considerable  increase,  rising 
steadily  with  the  increased  mileage,  as  follows : 


Year 


1896. 
1897. 
1898. 
1899. 
1900. 
1901. 
1902. 
1903. 
1904. 
1905. 
1906. 


Miles  Operated 

Gross  Earnings 

Per  Mile 

380 

$6,286,602 

$16,675 

380 

6,732,703 

17,858 

380 

6,664,028 

17,676 

380 

7,233,417 

19,059 

381 

7,845,412 

20,591 

381 

8,266,958 

21,695 

422 

8,456,685 

20,039 

450 

10,310,086 

22,911 

461 

10,288,204 

22,315 

462 

10,531,962 

22,793 

462 

11,632,633 

25,175 

NORTHERN  CENTRAL 


Maintenance. 


521 


The  road  has  been  very   heavily  charged  for   maintenance 
through  a  series  of  years,  as  the  following  table  reveals: 


Traffic  Density 

Maintenance  per  Mile 

TotaJ 

Way 

Equipment 

1900 

2,874,790 
2,826,046 
2,404,224 
2,822,372 
2,658,737 
2,740,254 
3,166,490 

$2,713 
2,930 
2,628 
2,790 
2,370 
3,127 
2,968 

$3,469 
3,588 
3,385 
4,334 
4,101 
4,565 
4,742 

$6,182 

1901 

6,518 

1902 

6,013 

1903 

7,124 

1904 

6,471 

1905 

7,692 

1906 

7,710 

Average.  .  . 

2,798,987 

$2,789 

$4,026 

$6,815 

Improvements. 

In  addition  to  the  heavy  charges  the  following  sums  have 
been  set  aside  from  surplus  earnings  for  special  improvements : 

1900 $1,011,451 

1901 1,101,139 

1902 700,000 

1903 908,484 

1904 920,681 

1905 827,000 

1906 1,100,582 

Total $6,569,337 

Surplus  Earnings. 

Including  the  liberal  appropriations  noted,  the  road  has  steadily 
earned  a  high  surplus,  as  follows : 


Year 

Surplus 

Per  cent. 

Earned  on 

Common  Stk. 

Dividends 

Paid  on 

Com.  Stk. 

Average 
price  ($50 
share) 

1900 

$1,695,484 
2,018,019 
1,746,547 
1,847,094 
2,077,131 
2,238.787 
2,715,788 

14.8 

17.7 

15.3 

16.2 

12. 

13.1 

15.7 

7 
8 
8 
8 
8 

a 

s 

86 

1901 

98 

1902 

115 

1903 

1904 

99 
94 

1905 

104 

1906 

104 

522  XORTHERN  CENTRAL 

Dividend  Record. 

For  a  series  of  years  the  dividend  record  has  been  as  follow; 

1888 7  % 

1889 8 

1890-1 7 

1892-3 8 

1894-1900 7 

1901-06 8 

1906 8  and  12}4%  stock 

The  Balance  Sheet. 

As  of  December  31st,  1906,  the  balance  sheet,  excluding  ma- 
terials and  supplies,  showed: 

Current   Assets $3,558,396 

Current   Liabilities 2,791,689 

Leaving  a  working  balance  of $766,707 

The  item  of  cash  was  $662,580  and  the  balance  to  credit  of 
profit  and  loss,  after  charging  oft  the  \2l/2 °/o  stock  dividend  amount- 
ing to  $2,149,168,  was  $1,860,467. 

Investment  Value. 

In  1906  a  movement  of  the  minority  stockholders  for  an  in- 
crease of  dividends,  resulted  in  the  declaration  of  the  stock  divi- 
dend already  noted  of  \2y2c/o.  The  regular  annual  dividend  remain- 
ing the  same,  this  was  equivalent  to  about  a  9%  dividend  for  the 
holders  of  record  of  1906.  For  present  purchasers  of  the  stock. 
however,  it  represents  simply  an  8%  stock  with  no  very  immediate 
prospect  for  an  increase  of  the  dividend.  The  exceptional  surplus 
shown  in  1906  was  eqivalent  to  15.7%  on  the  outstanding  stock  of 
that  year  and  to  an  even  14%  on  the  total  stock,  as  increased  b\ 
the  stock  dividend. 

It  is  to  be  noted  that  the  earnings  for  1906  were  considerably 
higher  than  the  average  for  the  preceding  four  years  and  that 
under  the  increase  of  stock  the  percentage  earned  on  the  common 
has  tended  to  decrease  from  the  high  point  of  1901.  The  mileage 
earnings  of  the  road  have  shown  very  little  tendency  to  increase 
in  the  five  or  six  years  preceding  1906,  nor  has  there  been  any 
very  heavy  increase  in  the  rate  of  maintenance  as  compared  with 
the  traffic  density. 


NORTHERN  CENTRAL  523 

Through  a  series  of  years  the  stock  has  oscillated  around  200 
I  i.e.  $100  for  $50  shares)  and  on  this  basis  the  yield  to  the  in 
vestor  is  about  4%.  The  price,  therefore,  as  compared  with 
money  rates  of  1906-7  was  high,  and  although  the  earnings  of 
the  stock  are  large,  an  8%  dividend  does  not  represent  much  more 
than  the  traditional  half-for-improvements  half-for-dividends  pol- 
icy of  the  Pennsylvania.  It  is  obvious,  therefore,  that  there  were 
other  stocks  on  the  list  representing  the  same  basis  of  security  (the 
road  is  largely  a  coal  line  and  therefore  very  sensitive  to  the 
prosperty  of  this  industry)  with  a  larger  prospect  of  profit  to 
to  the  purchaser. 


NORTHERN  PACIFIC  RAILWAY. 

The  Northern  Pacific  was  one  of  the  great  trancontinental 
enterprises  conceived  in  the  war  days,  and  at  that  time  justly  re- 
garded as  a  vast  and  momentous  undertaking.  The  extraordinary 
growth  in  wealth  and  railway  mileage  of  the  country  seems  now 
to  dwarf  the  courage  and  daring  which  these  efforts  at  railroad 
construction  across  the  Rockies  demanded,  and  today  the  Northern 
Pacific  is  merely  one  of  six  huge  systems  which  connect  the  Pacific 
with  the  Mississippi  Valley. 

Involved  in,  and  in  part  the  cause  of,  two  great  national 
disasters,  the  history  of  the  Northern  Pacific  is  one  of  the  colorful 
chapters  of  American  railroading  and  finance.  From  the  chaos  of 
the  last  crash,  that  of  1893,  the  road  has  risen  to  phenomenal 
heights  of  prosperity,  directly  operating  over  6,000  miles  of  railroad, 
possessed  of  interests  of  enormous  value  outside  of  railroading 
proper  and  today  one  of  the  richest  and  strongest  railway  cor- 
porations of  the  country.  In  later  years  it  has  come  under  practi- 
cally the  same  ownership  as  its  chief  rival,  the  Great  Northern, 
and  is  the  principal  property  in  what  is  commonly  known  as  the 
Hill-Morgan  lines. 

History. 

Chartered  by  Congress  in  1864,  construction  was  not  begun 
until  1869.  The  road  was  given  a  collossal  land  grant.  12,600 
acres  to  the  mile  in  the  states  of  Minnesota  and  Oregon,  and  25,600 
acres  per  mile  in  the  then  intermediate  territories.  Its  dominating 
genius  was  Jay  Cooke,  who  had  come  out  of  the  war  period  as  one 
of  the  chief  of  American  financiers.  The  section  from  Duluth  to 
Bismarck  on  the  Missouri  River  was  completed  in  1873,  and  in  the 
same  year  the  banking  house  of  Jay  Cooke  and  Company  went 
down,  precipitating  the  panic  of  1873.  The  road  was  involved  in  the 
fall  of  its  backers,  passed  into  the  hands  of  a  receiver,  and  was 
sold  under  foreclosure  in  1875.  The  company  had  been  mon- 
strously over-capitalized,   despite   the  enormous  land   grant   which 

(524) 


NORTHERN  PACIFIC  525 

it  had  received.  When  less  than  600  miles  was  completed  it  had 
$100,000,000  of  share  capital,  with  $43,000,000  in  bonds.  Up  to 
that  time  it  was  estimated  that  less  than  $22,000,000  had  actually 
been  spent  upon  construction,  and  a  large  part  of  this  had  been 
wasted.  This  was  not  one  of  the  first,  but  it  was  up  to  that  time, 
^nd  for  long-  after,  one  of  the  great  scandals  which  gave  American 
railroading  and  American  securities  so  bad  a  name  in  Europe. 

The  Cooke  regime  was  succeeded  by  that  of  Henry  Villard, 
under  whose  direction  the  work  of  construction  was  aggressively 
resumed.  In  September,  1883  the  last  spike  was  driven,  completing 
the  line  through  to  Puget  Sound  and  the  Pacific  Coast.  A  boom 
whose  proportions  have  only  been  exceeded  by  that  of  the  last  two 
or  three  years,  ensued ;  vast  crowds  of  settlers  flocked  to  the  North- 
west; the  earnings  of  the  road  grew  like  Jonah's  gourd  until  in 
the  climatic  year  of  1900-1  they  had  reached  a  total  of  $25,000,000 
per  annum,  a  tremendous  sum  compared  with  the  general  railway 
earnings  of  that  time. 

The  collapse  that  followed  can  only  be  described  as  terrific. 
In  the  fiscal  year  closing  June  30th,  1893,  the  earnings  were  still 
but  a  shade  under  $24,000,000;  in  the  following  year  they  had 
fallen  to  $16,500,000;  and  the  net  earnings,  which  had  reached 
over  $10,000,000  in  the  two  years  of  1890  and  1891,  fell  to  a  little 
over  $4,000,000;  that  is  to  say,  gross  earnings  fell  a  full  third,  and 
the  net  earnings  a  full  two-thirds.  The  road  passed  again  into 
bankruptcy,  the  Villard  regime  came  to  an  end,  and  in  1896  the  road 
was  taken  from  the  receivers  by  a  syndicate  headed  by  J.  P.  Morgan 
and  Company,  the  Deutsche  Bank  of  Berlin,  and  Drexel  and  Com- 
pany. The  reorganization  was  very  throughly  carried  out,  ample 
funds  for  the  upbuilding  of  the  road  were  provided,  and  from 
that  period  to  the  present  time  its  earnings  have  risen  steadily, 
reaching  in  1906  the  record  figure  of  $61,000,000. 

The  average  earnings  per  mile,  which  had  fallen  to  $3,703  in 
1894,  reached  in  1906,  $11,335.  About  2.000  miles  had  been  added 
to  the  road,  a  huge  surplus  accumulated,  and  outside  properties  of 
enormous  value  acquired.  The  stock  of  the  road,  which  might 
have  been  picked  up  ten  years  before  for  a  few  dollars  a  share, 
was  in  1906  selling  at  over  $200  per  share. 

Under  the  Villard  regime  the  road  had  leased  the  Wisconsin 
Central,  thereby  acquiring  an  outlet  lo  Chicago,  but  this  was  re- 
linquished by  the  receivers  and  permanently  abandoned  in  the  re- 
organization of  1896.     Rut  in  1901.  control  of  the  Burlington  was 


526  NORTHERN  PACIFIC 

jointly  purchased  by  the  Northern  Pacific  and  the  Great  Northern, 
these  two  roads  exchanging  for  about  98%  of  the  stock  of  the 
lessee  company  their  4%  collateral  trust  bonds,  secured  by  a  deposit 
of  the  stock  so  held.  The  exchange  was  on  the  basis  of  $200  per 
share.  Since  this  purchase  the  earnings  of  the  Burlington  have 
very  rapidly  increased,  and  the  Northern  Pacific's  half  of  the 
undistributed  earnings  of  the  Burlington  comprises  an  asset  of 
great  value.  Through  this  purchase  the  two  roads  obtained  joint 
control  of  a  line  from  St.  Paul  to  Chicago,  a  strategic  advantage 
which  had  been  lost  to  the  Northern  Pacific  through  the  surrender 
of  the  lease  of  the  Wisconsin  Central. 

In  1901  the  Northern  Securities  Company  was  formed  for  the 
purpose  of  harmonizing  the  interests  of  the  northerly  Pacific  roads, 
acquiring  99%  of  the  stock  of  the  Northern  Pacific,  and  about 
75%  of  the  Great  Northern;  and  these  two  roads  in  turn  controlled 
by  ownership  of  stock,  the  Burlington  system.  This  vast  merger, 
carried  out  by  Messrs.  Hill  and  Morgan,  raised  a  great  outcry,  and 
was  violently  attacked  in  the  courts.  The  decision  was  adverse  to 
the  company  on  the  ground  that  it  was  in  effect  the  consolidation 
of  competing  lines;  and  the  stock  which  it  had  acquired  was  re- 
turned to  its  original  owners. 

The  immediate  occasion  of  the  formation  id  the  company  was 
the  attempt  of  the  Harriman-Union  Pacific  interests  to  secure 
control  of  the  Northern  Pacific  through  purchase  of  its  stock. 
This  attempt  resulted  in  the  famous  Northern  Pacific  "corner"  of 
1901.  when  the  stock  sold  up  to  as  high  as  $700  to  $1,000  per  share. 
The  Union  Pacific  interests  had  acquired  an  actual  majority  of  the 
stock,  but  their  purpose  was  defeated  through  a  clause  in  the 
articles  of  the  reorganization,  whereby  the  preferred  stock  could  be 
retired  at  any  time  at  the  pleasure  of  the  company.  This  was 
done  and  the  Hill-Morgan  interests  retained  and  still  retain  control 
of  the  road. 

In  1901  the  Canadian  branches,  in  Manitoba,  aggregating  354 
miles,  were  leased  for  999  years  to  the  Provincial  government  and 
sublet  by  the  latter  to  the  Canadian  Northern  Railway  at  a  rental 
of  $210,000  for  the  first  ten  years,  with  the  option  of  purchase 
at  any  time  for  $7,000,000. 

The  merger  of  several  small  roads  in  Washington  since  1898. 
has  restored  to  the  road  all  of  the  mileage  comprised  in  the  old 
Northern  Pacific  system  prior  to  the  receivership  of  1803,  and  in 
1900  the  St.  Paul  and  Duluth  was  merged  and  its  bonded  debt  was 


NORTHERN  PACIFIC  527 

assumed.    The  purchase  carried  with  it  rich  ore  lands  in  the  Mesaba 
range. 

In  1906  the  Portland  and  Seattle  was  under  construction,  under 
the  joint  ownership  and  control  of  the  Northern  Pacific  and  the 
Great  Northern,  designed  to  give  these  two  roads  a  low-grade  line 
from  Spokane  through  to  tidewater  at  Portland. 

Ownership. 

By  1901  James  J.  Hill  had  entered  the  directorate  of  the 
Northern  Pacific  and  the  alliance  of  the  Hill  interests  with  the 
Morgan  interests  was  openly  declared.  After  the  defeat  of  the 
merger  plan.  Mr.  Hill  retired  from  the  directorate  and  was  suc- 
ceeded by  his  son,  James  N.  Hill,  afterwards  made  first  vice- 
president  of  the  road. 

The  dominance  of  the  Hill-Morgan  interests  is  reflected  in  the 
directorate,  which  includes  J.  P.  Morgan,  Jr.,  Charles  Steele,  and 
George  W.  Perkins,  of  the  firm  of  J.  P.  Morgan  and  Company, 
directly  representing  the  Morgan  interests ;  George  F.  Baker,  presi- 
dent, and  D.  Willis  James,  a  director  of  the  First  National  Bank, 
New  York ;  John  S.  Kennedy,  also  a  director  in  the  Burlington  and 
vice-president  of  the  Northern  Securities  Company;  Lewis  Cass 
Ledyard,  vice-president  and  director  of  the  American  Express  Com- 
pany, also  a  director  of  the  Boston  and  Maine;  Grant  B.  Schley, 
also  a  director  of  the  New  York,  Ontario  and  Western;  William 
Sloane,  of  the  firm  of  W.  &  J.  Sloane,  New  York;  William  P. 
Clough,  4th  vice-president  and  general  counsel  of  the  Northern 
Securities  Company;  Amos  Tuck  French,  vice-president  of  the 
Manhattan  Trust  Company,  New  York,  and  also  a  director  in  the 
Burlington;  Alex.  Smith  Cochran,  and  Payne  Whitney,  of  New 
York;  Howard  Elliott,  president,  St.  Paul;  and  James  N.  Hill, 
vice-president,  New  York. 

The  executive  committee  comprised  George  F.  Baker,  William 
P.  Clough,  Charles  Steele,  D.  Willis  James,  John  S.  Kennedy, 
Howard  Elliott,  and  James  N.  Hill.  It  will  be  seen  that  the  Harri- 
man-Union  Pacific  interests  are  not  represented  on  the  board.  On 
June  30.  1905.  the  Oregon  Short  Line,  holding  company  for  the 
Union  Pacific,  owned  in  effect,  $29,390,885  of  the  capital  stock  of 
the  road,  but  it  is  understood  that  a  large  part,  if  not  all  of  this 
interest  was  subsequently  sold. 

In  the  actual  management  of  the  road,  President  Hill  of  the 
Great  Northern,  is  regarded  as  the  controlling  mind,  and  to  all 


528  NORTHERN  PACIFIC 

intents  the  Great  Northern,  the  Northern  Pacific,  and  the  Burlington 
are  operated  as  a  single  system. 

Capitalization. 

As  of  June  30th,  1906,  the  capital  account  of  the  road  stood  as 
follows : 

Common   stock $155,000,000 

Funded  Debt  (not  inc:  Gt.  Nor.-N.  P. 

Joint   Col.   bonds) 186,345,812 

Total    Capital $341,345,812 

Securities    held 19,980,878 

Approx.  Net  Capital $321,364,934 

Approx.  net  capital,  per  mile $59,512 

Average  miles   operated 5,401 

Net  earnings  on  net  capitalization 9.6% 

Stock  on  net  capitalization 48% 

Fixed  Charges  on  Total  net  Income.  . .  .  29% 

Factor  of  Safety 71% 

The  above  estimate  does  not  include  $107,612,600,  the  Northern 
Pacific's  half  of  the  4%  collateral  bonds  issued  for  the  purchase 
of  the  Burlington,  but  does  include  the  funded  debt  of  several 
subsidiary  roads  now  merged  with  the  Northern  Pacific. 

As  a  part  of  the  securities  held  is  included  the  value  of  the 
leased  lines  in  Canada  leased  to  the  Province  of  Manitoba,  and 
under  contract  of  sale  for  $7,000,000  at  the  option  of  the  lessees. 

It  will  be  seen  that  the  mileage  capitalization  is  high  com- 
pared with  other  of  the  north  Pacific  transcontinental  lines,  its 
$59,512  per  mile  comparing  with  $42,362  for  the  Great  Northern, 
$28,613  for  the  Canadian  Pacific,  and  about  $50,000  for  the  estimated 
net  capitalization  of  the  Union  Pacific.  Although  this  capitaliza- 
tion is  high  for  a  road  of  the  character  of  the  Northern  Pacific, 
its  earnings  have  been  so  enormous  within  recent  years  that  the 
capitalization  is  actually  low  when  compared  with  earnings,  the  net 
earnings  showing  9.6%  on  the  estimated  net  capitalization.  This 
figure  compares  with  10.1  rfr  for  the  Great  Northern;  9.4%  for  the 
Canadian  Pacific  ;  and  around  8%    for  the  Union  Pacific. 

Of  the  net  capitalization,  nearly  one-half  is  made  up  of  stock, 
and  the  Fixed  Charge?  are  extremely  low.  consuming  in  1906,  less 


NORTHERN  PACIFIC  529 

than  30%  of  the  total  net  income,  leaving  a  Factor  of  Safety  for 
the  underlying  securities,  of  about  70%.  This  showing,  as  will 
afterwards  be  seen,  was  not  accomplished  through  any  skimping 
of  operating  expenses. 

Equities    Owned. 

Of  the  items  of  securities  held,  as  already  noted,  $7,000,000  is 
represented  by  the  price  fixed  upon  the  leased  lines  in  Canada ;  the 
balance  is  made  up  principally  of  stocks  and  bonds  of  smaller 
subsidiary  companies,  representing  no  equities  of  moment. 

But  the  Northern  Pacific  has  at  least  three  other  great  interests, 
aggregating  in  value  from  $100,000,000  to  $150,000,000,  not  in- 
cluded among  the  items  of  securities  owned  nor  deducted  from 
the  estimated  capitalization. 

The  first  of  these  is  what  remains  of  the  collossal  land  grants, 
donated  to  the  road  by  the  national  government.  From  these 
there  has  already  been  derived  from  cash  sales  an  enormous  sum, 
probably  sufficient  to  have  more  than  paid  the  entire  actual  cost  of 
the  road. 

At  the  present  time  nearly  ten  million  acres  of  this  land 
still  remain.  In  1906,  141,000  acres  were  sold  for  which  the  road 
received  $1,110,000,  or  an  average  of  nearly  $8  per  acre.  Were 
the  remaining  lands  to  be  valued  at  no  more  than  half  this  amount, 
<>r  at  $4  an  acre,  they  would  still  represent  an  asset  of  nearly  $40,- 
000,000.  In  addition  to  the  above  the  road  had  outstanding  contracts 
on  land  sales  amounting  to  $4,000,000.  From  the  land  sales  of 
1906,  $1,088,000  was  carried  to  the  credit  of  "The  Northern  Pacific 
Estate,"  the  designation  in  the  reports  of  the  item  usually  known  as 
"Cost  of  the  Road,"  the  amount  so  credited  being  deducted  from 
this  capital  account.  This  amount  does  not  appear  as  part  of  the 
income  of  the  road  and  applies  in  the  reduction  of  the  new  mileage 
and  other  charges  to  capital  account. 

This  sum  is  not  included  as  a  part  of  the  estimate  of  the 
total  net  income  of  the  road. 

The  second  of  the  Northern  Pacific's  large  equities  is  its  interest 
in  the  surplus  earninq-s  of  the  Burlington,  over  and  above  the 
amount  required  to  pay  the  interest  on  the  joint  collateral  trusi 
bonds.  A  full  discussion  of  this  equity  is  to  be  found  in  the  analysis 
of  the  Burlington  road,  and  it  is  there  shown  that  the  actual  surplus 
Dver  and  above  reasonable  maintenance  charges  was  for  1906  around 
eight  or  nine  millions  of  dollars.     At  least  bait  of  this  might  legiti- 

34 


530  NORTHERN  PACIFIC 

mately  have  been  divided  between  the  two  proprietary  roads,  and 
had  no  more  than  this  been  done,  the  Northern  Pacific  could  have 
added  at  least  two  million  dollars  to  its  "other  income"  for  1906.  It 
is  likewise  shown  that  upwards  of  twenty  million  dollars  has  been 
earned  by  the  Burlington  and  put  back  into  the  road  since  the  joint 
purchase,  and  half  of  this  may  be  legitimately  included  in  the 
estimate  of  the  Northern  Pacific's  equity. 

It  is  extremely  difficult  to  fix  a  valuation  on  an  asset  which 
may  be  arbitrarily  determined  among  the  controlling  interests  of 
the  Great  Northern  and  Northern  Pacific,  but  in  the  event  of  the 
sale  of  the  Northern  Pacific's  Burlington  interest,  it  is  not  improb- 
able that  it  would  receive  the  equivalent  of  at  least  $30,000,000  in 
some  form  or  other,  and  possibly  very  much  more.  Roughly  speak- 
ing, this  asset  might  be  assessed  at  from  thirty  to  forty  million 
dollars.  Thus  far  the  Northern  Pacific  has  received  nothing  directly 
from  its  purchase  of  the  Burlington  and  its  guarantee  on  the 
purchase  bonds. 

The  third  of  the  Northern  Pacific's  holdings  are  the  rich  ore 
lands  in  the  Mesaba  range  acquired  through  the  purchase  of  the 
St.  Paul  and  Duluth.  These  are  nothing  like  the  holdings  of  the 
Great  Northern,  in  extent  or  value,  but  they  are  still  estimated  to 
contain  in  the  neighborhood  of  36  million  tons  of  iron  ore.  On  the 
basis  of  the  lands  yielding  no  more  than  the  sum  fixed  in  the 
Great  Northern's  contract  with  the  U.  S.  Steel  Corporation,  the 
average  rate,  if  this  amount  of  iron  were  mined  in  24  years,  would 
be  at  least  $1.25  per  ton,  which  would  give  a  total  valuation  to  the 
property  of  upwards  of  $40,000,000.  It  should  be  understood  that 
only  very  vague  estimates  can  be  made  of  the  actual  quality  of  ore 
contained  in  these  holdings.  It  is  probably  safe  to  say  that  the 
actual  value  of  this  land  is  at  least  half  the  gross  estimate,  and  if 
it  were  assessed  at  $20,000,000  this  would  be  well  within  its  true 
worth. 

Were  these  ores  mined  at  a  rate  to  exhaust  the  nominal  estimate 
of  their  amount  in  from  24  to  38  years,  this  would  mean  average 
receipts  to  the  Northern  Pacific  of  upwards  of  one  and  a  half 
million  dollars  per  year,  or  equivalent  to  about  one  per  cent. 
annually  on  the  outstanding  amount  of  Northern  Pacific  stock. 

In  addition  to  the  holdings  enumerated  above,  the  balance 
sheet  of  the  road  showed  $5,600,000  advanced  to  the  Portland 
and  Seattle  Railway,  now  under  construction  jointly  by  the  Northern 
Pacific  and   the   Great   Northern,   and   over   and  above  its  current 


NORTHERN  PACIFIC  531 

liabilities,  improvement  fund,  etc.,  the  balance  sheet  for  1906  showed 
quick  assets,  excluding  materials  on  hand,  of  upwards  of  $7,000,000, 
an  insurance  fund  of  $2,000,000,  and  a  balance  of  land  department 
assets  of  $3,200,000.  Taking  all  these  assets  and  equities  at  the 
most  conservative  valuation  they  still  showed  as  follows : 

Farm   lands $40,000,000 

Ore  lands 20,000,000 

Burlington  equity 30,000,000 

Leased    lines 7,000,000 

Treasury  securities 13,000,000 

Seattle  and  Portland  Railway  advance..  5,700,000 

Balance  of  current  assets 7,000,000 

Land  Department  and  insurance  fund...  5,200,000 

Making  a  total  of $127,900,000 


This  would  be  the  equivalent  of  three-quarters  of  the  capital 
stock  of  the  company.  These  valuations,  it  should  be  understood, 
arc  simplv  vague  estimates,  and  would  of  course  be  very  materially 
scaled  under  less  prosperous  conditions  than  those  of  1906.  Under 
favorable  conditions  it  is  probable  that  the  estimates  given  are 
within  33%  more  or  less  of  the  realizable  value,  providing  the 
properties  were  held,  and  the  Northwest  should  undergo  no  such 
drastic  set  back  as  followed   1893. 

Increase  of  Capitalization. 

Since  the  reorganization  of  the  company  in  1896.  there  was  no 
increase  in  its  capital  stock,  the  preferred  stock  simply  being  retired 
at  par  on  January  1,  1902,  for  an  equal  amount  of  common  stock. 
Moreover,  up  to  1906  there  was  but  a  very  slight  increase  in 
the  funded  debt,  while  in  six  years  its  earnings  have  increased  enor- 
mously.    The  items  appear  as  follows : 


Year 

Common        Preferred 
Stock              Stock 

Funded 
Debt 

Total 
Capital 

Gross 
Earnings 

1900.... 
1906... 

$80,000,000   $75,000,000 
155,000,000      (retired) 

$171,346,596 
186,345,812 

$326,346,596 
341,345,812 

$30,021,318 
61,223,475 

Increase  over  six  years:        Total  capital,  5%;    gross    earnings,  104% 


532  NORTHERN  PACIFIC 

It  will  be  seen  that  with  an  increase  of  capitalization  amounting 
to  less  than  1%  per  annum,  gross  earnings  of  the  road  have  more 
than  doubled.  Nothing  could  better  indicate  the  simply  fabulous 
prosperity  of  the  Northern  Pacific's  territory  within  this  period. 

At  the  close  of  1906  $93,000,000  of  new  stock  was  issued  to 
subscribers  at  par,  to  the  extent  of  60%  of  their  holdings,  payments 
to  be  made  in  quarterly  installments  extending  to  January  1st, 
1909. 

Character  of  Traffic. 

The  Northern  Pacific  does  not  separately  itemize  its  traffic. 
Passenger  earnings  in  1906  amounted  to  about  one-quarter  of  the 
gross,  and  freight  earnings  to  a  little  less  than  three-quarters. 

The  average  rate  per  ton-mile  was  high  compared  with  eastern 
roads,  amounting  to  .83c.  per  ton  per  mile.  This  was  against  an 
average  rate  of  1.11c.  through  the  depression  of  1893-7,  and  of  1.05c. 
in  1899,  which  was  general  bedrock  for  the  railroads  of  the  country. 
In  other  words,  since  the  reorganization  the  average  rate  has 
declined  more  than  25%,  so  that  the  extraordinary  earnings  are 
not  due  to  an  increase  in  the  rates.  But  in  spite  of  this  heay> 
reduction  in  the  average,  rates  are  still  25  or  30%  higher 
than  the  general  average  of  roads  east  of  the  Mississippi,  and 
while  these  rates  could  probably  be  maintained  in  highly  pros- 
perous years  like  1900-06,  it  is  fairly  certain  that  they  would  have 
to  be  still  further  reduced  under  less  favorable  general  conditions. 

It  goes  without  saying  that  a  very  large  part  of  the  Northern 
Pacific's  traffic  is  the  carriage  of  grain  and  especially  of  wheat. 
But  as  the  mineral  resources  of  Minnesota,  Montana,  Idaho  and 
Washington  steadily  develop,  especially  in  the  direction  of  coal  and 
inm  and  as  the  Pacific  carrying  trade  from  the  Puget  Sound  ports 
increases,  the  road  will  be  less  and  less  dependent  upon  the  wheat 
fields  for  its  earnings.  The  steady  natural  gain  of  traffic  should 
certainlv  be  sufficient  to  offset  the  progressive  reduction  in  the 
rates,  which  will  doubtless  continue  until  they  have  reached  some- 
where near  the  general  average  of  the  country. 

It  seems  to  be  the  intention  of  President  Hill  to  make  the 
Great  Northern  more  and  more  of  a  freight  road,  turning  over 
the  tourist  traffic  more  to  the  Northern  Pacific,  to  which  the 
latter  lends   itself  more  especially,   while   the   lower  grades  on  the 


\(  JRTHERN  PACIFIC 


533 


Great  Northern   permit   of  much   more   profitable    freight   haul,   at 
lower  rates. 

Stability  of  Earnings. 

In  the  following  table  is  given  the  record  year  of  the  Villard 
management,  that  of  1890-1,  the  panic  year  of  1893-4,  the  last  year 
of  the  receivership,  and  the  nine  full  years  that  have  ensued  since 
the  reorganization  of  1896: 


Year 


1890-1 
1893-4 
1895-1'. 
1897-8 
1898-9 
1899-0 
1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


Miles  Operated 

Gross  Earnings 

Per  Mile 

4,222 

$25,151,544 

$5,941 

4,468 

16,527,210 

3,703 

4,404 

19,863,160 

4,509 

4,362 

23,679,118 

5,428 

4,579 

26,048,673 

5,688 

4,714 

30,021  318 

6,368 

5,100 

32,560,984 

6,384 

5,019 

41,387,380 

8,246 

5,112 

46,142,105 

9,026 

5,262 

46,524,574 

8,841 

5,315 

50,722,886 

9,543 

5,401 

61,223,745 

11,335 

(Year  of  1896-7  reported  only  for  10  months.) 

Under  the  Villard  regime  gross  earnings  had  reached,  in  1889- 
90,  $6,272  per  mile.  These  mileage  earnings  in  the  panic  year 
were  nearly  cut  in  two,  declining  to  $3,703  per  mile.  In  the  last 
year  of  the  receivership  they  were  $4,509,  and  in  1906,  $11,331. 
In  American  railroad  history,  there  are  few  more  remarkable  records 
of  a  swift  and  devastating  slump  and  an  almost  pyrotechnic  rise, 
the  increase  for  the  single  year  of  1906  amounting  to  $1,790  per 
mile,  or  a  clean  increase  of  nearly  20%.  It  goes  without  saying 
that  these  have  been  years  of  exceptional  prosperity,  and  that  the 
same  rate  of  increase  could  hardly  be  maintained  indefinitely.  But 
the  road  is  to-day  in  a  position  of  such  exceptional  strength  that 
it  could  readily  meet  some  recession  from  this  rapid  growth  without 
feeling  the  pinch. 

Maintenance. 

The  following  table  reveals  the  extraordinary  growth  in  the 
traffic  density  of  the  Northern  Pacific  within  no  more  than  six 
years.  Within  this  period  the  ton  mileage  per  mile  of  road  operated 
has  doubled,  but  it  will  be  seen  that  the  maintenance  charges  have 
been  increased  by  nothing  like  this.    The  items  stand  as  follows : 


534 


NORTHERN  PACIFIC 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

478,561 
657,551 
746,467 
700,432 
820,257 
971,344 

$1,027 
1,348 
1,392 
1,263 
1,382 
1,387 

$481 
678 
760 
782 
951 

1,098 

$1,508 
2,026 
2,152 
2,045 

2,333 
2,485 

Average.  . . . 

729,102 

$1,300 

$791 

$  2,091 

Burlington 

580,024 

1,104 

1,032 

2,136 

Can.  Pac 

458,589 

850 

1,002 

1,852 

Gt.  North 

650,321 

960 

594 

1,554 

Union  Pac. .  . . 

739,206 

1,173 

1,049 

2,222 

Atchison 

577,005 

1,123 

1,113 

2,236 

Sou.   Pac 

594,898 

1,446 

1,246 

2,692 

It  will  be  seen  that  had  maintenance  been  increased  at  a 
parallel  rate  with  the  increase  of  traffic,  charges  for  1906  would 
have  been  over  $3,000  per  mile,  while  as  a  matter  of  fact  they 
were  $500  a  mile  less  than  this. 

Comparing  the  Northern  Pacific's  charges  with  the  Burlington, 
it  will  be  seen  that  with  a  traffic  density  averaging  through  these 
six  years  about  25%  more  than  the  Burlington,  its  average  main- 
tenance charges  were  slightly  less.  In  1906  the  Burlington  main- 
tenance was  $319  per  mile  more  than  the  Northern  Pacific's,  with  a 
25%  lower  traffic  density.  The  discrepancy  on  a  basis  of  equal 
traffic,  amounted  to  a  full  thousand  dollars  per  mile.  It  is  not 
easy  to  see  why  two  roads  not  differing  so  very  widely  in  territory, 
nor  in  character  of  traffic,  should  present  so  wide  a  difference  in 
maintenance  charges. 

Undoubtedly  the  Burlington's  charges  were  high,  but  the 
difference  is  so  great  as  at  least  to  suggest  a  doubt  if  any  con- 
siderable amount  of  earnings  were  concealed  in  the  Northern 
Pacific's  charges.  The  charges  were  probably  adequate;  they  hardly 
seem  excessive.  They  were,  it  is  true,  considerably  higher  than  those 
of  the  Great  Northern,  but  it  must  be  remembered  that  the  Great 
Northern  is  one  of  the  roads  showing  operating  expenses  of  only 
50%  of  gross,  against  a  general  average  of  the  country  of  68%  ; 
and  it  will  almost  invariably  be  found  that  such  a  showing  is 
obtained  at  the  expense  of  maintenance  charges. 


NORTHERN  PACIFIC  535 

It  is  improbable,  for  example,  that  the  Northern  Pacific  can  be 
maintained  satisfactorily  at  a  much  lower  figure  than  the  Atchison 
The  Atchison  shows  about  the  same  average  traffic  density  over 
these  six  years  as  the  Burlington,  and  its  average  maintenance 
charges  for  this  period  are  slightly  higher  than  the  Burlington's. 
This  again  means  that  there  is  a  difference  in  maintenance  charges 
on  a  basis  of  equal  traffic,  of  about  $1,000  per  mile  of  road  be- 
tween the  Atchison  and  the  Northern  Pacific.  This  need  not  mean 
that  the  Northern  Pacific's  maintenance  has  been  skimped,  but  it 
does  mean  that  on  a  similar  basis  of  charges  the  Northern  Pacific's 
surplus  would  have  been  four  or  five  million  dollars  less,  or  the 
Atchison's  surplus  would  have  been  six  or  seven  million  dollars 
more,  than  they  were  in  1906.  It  means  at  least  that  the  surplus 
shown  by  the  Atchison  or  the  Burlington  was  on  a  much  sounder 
basis  than  that  of  Northern  Pacific,  while  Northern  Pacific  was  on 
a  much  sounder  basis  than  the  Great  Northern  or  the  Canadian 
Pacific. 

Improvements  from  Earnings. 

With  the  Northern  Pacific,  as  with  so  many  other  roads,  how- 
ever, the  maintenance  charges  represent  only  a  part  of  the  actual 
amount  expended  in  the  maintenance  and  improvement  of  the 
road.  In  addition  to  the  charges  shown,  the  following  sums  since 
the  reorganization  have  been  appropriated  from  earnings  for  better- 
ments : 

1897-8 $811,709 

1898-9 2,176,619 

1899-0 3,000,000 

1900-1 2,011,285 

1901-2 3,000,000 

1902-3 3,000,000 

1903-4 3,000,000 

1904-5 3,000,000 

1905-6 6,081,980 

Total $26,081,593 

This  is  a  solid  sum  and  the  appropriations  in  1906  were 
especially  heavy.  In  1906,  in  addition  to  the  $3,000,000  regularly  set 
a-ide  for  some  years  for  betterments,  $2,000,000  was  written  off  on 
account  of  the  depreciation  of  equipment,  and  $1,081,980  was 
diverted  from  the  earnings  for  insurance  fund. 


536 


NORTHERN  PACIFIC 


Since  1900  these  special  appropriations  total  over  $20,000,000, 
which  stands  for  example  against  similar  appropriations  in  the 
same  period  of  $18,057,700  for  the  Atchison,  and  $15,130,910  for 
the  Great  Northern,  and  nothing  at  all  on  the  Burlington. 

While  therefore  the  maintenance  charges  on  the  Northern 
Pacific  for  1906  were  hardly  up  to  the  standard  of  previous  years, 
and  that  standard  not  excessively  high  as  compared  with  other 
roads,  this  difference  has  been  fully  offset  by  the  heavy  appropria- 
tions from  earnings,  and  here  as  always,  investors  will  be  on  their 
guard  against  being  deceived  by  mere  bookkeeping  appearances. 


Surplus  Earnings. 

The  surplus   for  six  years  before  charging  off  special  appro- 
priations noted  above  has  shown  as  follows : 


Dividends 

Per  cent. 

Dividends 

Year 

Surplus 

Paid  on 

Earned  on 

Paid  on 

Average 

Preferred 

Common 

Common 

Price 

1900-1 

$9,213,904 

4 

7.8 

4 

113 

1901-2 

13,047,232 

1  (Retired 

8.4 

5* 

. .  . 

1902-3 

14,745,889 

Jan.  1,1902) 

9.5 

7 

. . . 

1903-4 

15,229,311 

- 

9.8 

6f 

. . . 

1904-5 

17,126,242 

- 

11.4 

7 

190 

1905-6 

22,487,740 

**" 

14.5 

7 

205 

The  surplus  of  1906  was  sufficient  to  pay  the  regular  7%  divi- 
dend on  the  stock,  set  aside  $3,000,000  for  betterments,  charge  off 
$2,000,000  for  depreciation  of  equipment,  turn  $1,081,000  into  the 
insurance  funds,  and  carry  $5,500,000  to  the  credit  of  Profit  and 
Loss  for  the  operations  of  the  year. 

But  it  has  already  been  noted  that  had  the  Northern  Pacific 
been  maintained  on  the  same  liberal  scale,  let  us  say,  as  the  Burling- 
ton, or  the  Atchison,  this  would  have  made  a  difference  of  between 
four  and  five  million  dollars  in  the  surplus  shown,  or  sufficient  to 
wipe  out  .the  larger  part  of  the  net  surplus  over  dividends  and 
appropriations.  Were  such  a  reduction  to  be  made  the  nominal 
amount  earned  on  the  stock  would  have  represented  between  ten  and 
eleven  per  cent,  instead  of  fourteen  and  a  half.  Considering  the 
high  standard  of  maintenance  which  has  been  set  within  recent 
years  on  American  railroads,  it  is  probable  that  this  represents  more 
nearly  the  actual  earnings  for  the  stock  than  the  nominal  percentage 
shown  in  the  table. 


NORTHERN  PACIFIC  537 

The  Balance  Sheet 

At  the  close  of  the  fiscal  year  of  1906,  the  road  showed : 
Current    assets,    not    including    materials 

on   hand $26,646,767 

Current     liabilities 18,871,684 


Leaving  a  working  balance  of $7,775,083 


Of  the  current  assets  shown,  $22,000,000  was  clear  cash. 
Nothing  could  better  illustrate  the  prosperous  condition  of  the 
road.  Over  and  above  these  were  the  insurance  funds,  sinking 
fund,  land  department  assets,  advances  to  the  Portland  and  Seattle 
Railway,  etc.,  which  woidd  carry  the  quick  assets  to  about  $13,000,- 
000.  The  amount  to  the  credit  of  Profit  and  T,oss  (excess  of 
earnings  and  miscellaneous  income  over  all  payments  from  Sep- 
tember 1st,  1896,  to  June  30th,  1906)  was  $19,936,979. 

Dividend  Record. 

In  its  old  days  Northern  Pacific  dividends  were  erratic  and 
rather  spare.  Since  the  reorganization  dividends  were  paid  on 
the  preferred  stock  from  1898,  and  on  the  common  from  1899.  The 
record  for  a  series  of  years  is  as  follows : 

Year.  Preferred.  Common. 

%  % 

1883 11.1  in  certificates  due  1888. 

1884-9 — 

1890-1 4 

1892 2 

1893-7 — 

1898 5 

1899 4  2 

1900-1 4  4 

1902 1     (final ;  stock  retired)     S]/2 

1903 —  7 

1904 —  6     and  ^  extra. 

1905-6 —  7 

The  subscription  rights  to  the  new  issue  of  stock  at  the  close 
of  1906  was  equivalent  to  a  cash  dividend  of  from  $19  to  ^23  per 
share. 


538  NORTHERN  PACIFIC 

The  Northern  Pacific  has  joined  with  the  Great  Northern 
Railway  in  the  construction  of  a  new  line  from  Spokane  and 
eastern  Washington,  down  the  Columbia  to  Portland.  This  is 
designed  to  cut  out  the  severe  grades  on  the  two  roads  which 
lie  mainly  in  the  Cascade  Mountains.  The  new  road  is  more 
distinctly  a  low  grade  freight  line,  and  its  construction  and  pos- 
sibilities are  discussed  in  the  analysis  of  the  Great  Northern. 

Investment  Value. 

The  Northern  Pacific  is  another  of  the  roads  which,  like 
the  Atchison,  the  Reading,  the  Union  Pacific,  and  so  many 
others,  has  shown  such  a  phenomenal  rise  in  the  value  of  its 
stock  within  a  very  few  years.  At  the  close  of  1897,  after  more 
than  a  year  of  the  operations  of  the  reorganized  company,  tin- 
stock  was  still  to  be  had  for  from  ten  to  twenty  dollars  a 
share ;  in  1900  it  was  still  to  be  had  for  as  low  as  $45  per  share. 
In  that  year  4%  dividends  on  the  common  stock  were  begun. 
In  1901  came  the  famous  "corner,"  when  the  Harriman  interests 
endeavored  to  gain  control  of  the  road,  and  Mr.  Morgan  sent  back 
his  famous  message  from  Europe:  "Buy  control  and  hold  it." 
The  stock,  which  was  at  the  time  selling  a  little  over  par,  lose 
as  high  as  $700  per  share,  and  it  was  reported  that  some  of 
the  unfortunate  individuals  known  as  "shorts";  that  is  to  say, 
people  who  had  sold  property  that  they  did  not  own,  settled  on  a 
basis  of  as  high  as  $1,000  per  share.  Thereafter  the  stock  was 
taken  over  by  the  Northern  Securities  Company,  and  quota- 
tions did  not  again  appear  on  the  stock  exchange  for  three  years 
and  until  the  dissolution  of  the  latter  company. 

Tn  1905  the  stock  ranged  between  $165  and  $216  per  share ; 
in  February  of  1906  it  was  carried  as  high  as  $232  per  share, 
falling  in  the  very  moderate  slump  that  ensued  in  the  spring  to 
$179  per  share.  In  the  slump  of  March,  1907,  it  sold  ex-rights 
at  $115.  Wide  fluctuations  like  this  are  characteristic  of  stocks 
that  have  been  largely  bought  with  great  expectations,  and  it 
was  undoubtedly  great  expectations  which  lifted  the  quotations 
of  the  Northern  Pacific  to  so  high  a  figure.  At  the  average  price 
of  1906  the  yield  to  the  investor  was  rather  less  than  3^2%. 
Doubtless,  as  a  7%  stock,  earning  enough  to  pay  all  charges  and 
needful  appropriations,  and  still  leaving  enough  for  a  margin  of 
safety  of  50%  for  its  dividend,  the  Northern  Pacific  is  entitled  to 
sell  well  above  $200  per  share;  just,  for  example,  as  does  the 
Chicago  and  Northwestern. 


NORTHERN  PACIFIC  539 

Meanwhile  President  Hill,  who  so  largely  dominates  its 
policy,  has  gone  on  record  as  saying  that  a  7%  dividend  was 
high  enough,  and  that  with  more  than  enough  to  pay  this 
comfortably,  the  public  should  have  the  benefit  of  a  reduction 
in  rates.  Should  President  Mill's  policy  obtain,  then  it  is  not 
to  increased  dividends  that  the  investor  will  look  for  adequate 
returns  on  his  investment. 

Turning  to  the  Great  Northern,  we  find  another  company 
under  the  domination  of  President  Hill  likewise  paying  7%,  with 
nominal  earnings  rather  lower  than  those  of  the  Northern 
Pacific,  and  selling  in  1906  as  high  as  $348  per  share.  Obviously 
such  an  enormous  price  as  this  was  based  upon  expectations  of 
some  sort  of  a  "melon-cutting,'"  as  the  process  of  stock  distribu- 
tion has  come  to  be  called.  If  we  inquire  into  the  history  of  the 
Great  Northern,  we  shall  find  that  since  1899,  when  the  stock  was 
put  upon  a  7c/o  dividend  basis,  the  shareholders  have  received 
very  valuable  privileges  or  rights  to  subscribe  to  new  issues  of 
stock  at  very  much  below  the  market  quotations.  The  actual 
quoted  value  of  these  rights  in  the  eight  years  under  view 
amounts  to  a  total  of  about  77%  on  the  stock,  and  was  in  reality 
worth  very  much  more  than  this  to  shareholders  who  utilized 
their  privileges  instead  of  selling  their  rights.  This  is  an  average 
dividend  for  the  eight  years  of  very  nearly  10%,  which,  added 
to  the  regular  7%  dividend,  has  made  an  average  return  to 
Great  Northern  stockholders  of  nearly  17%  per  annum,  or  nearly 
two  and  a  half  times  the  nominal  dividend.  If  a  solid  7%  stock 
sells  for  an  average  price  of  around  $170  per  share,  Great  North- 
ern could  reasonably  have  commanded  on  the  basis  of  the  actual 
return,  well  above  $300  per  share,  or  considerably  above  the 
average  price. 

Northern  Pacific  shareholders  up  to  the  close  of  1906  had 
had  no  such  valuable  privileges.  There  had  been  no  addition  to 
the  capital  stock.  It  follows,  therefore,  that  the  premium  which 
Northern  Pacific  commanded  over  and  above  the  average  price 
of  a  7°/o  stock  has  been  based  purely  upon  expectations  and  not 
upon  accessory  dividends.  These  expectations  obviously  were 
based,  first,  upon  its  large  earnings ;  secondly,  upon  its  equities. 
It  has  already  been  shown  that,  had  only  half  the  surplus  earn- 
ings of  the  Burlington  been  distributed  to  its  owners,  this  would 
have  been  sufficient  in  1906  to  pay  an  extra  one  and  a  half  per  cent. 
on  the  Northern  Pacific  stock.     It  has  likewise  been  noted  that 


540  NORTHERN   PACIFIC 

the  lease  of  its  ore  lands  might  reasonably  yield  the  road  an  aver- 
age of  about  one  per  cent,  on  its  capital  slock  per  annum  for  the 
nexl  twenty  or  thirty  years. 

It  has  been  repeatedly  rumored  that  the  Great  Northern 
would  take  over  the  Northern  Pacific's  share  in  the  Burlington, 
and  if  this  were  done,  this  would  undoubtedly  mean  a  very  con- 
siderable "melon-cutting"  for  the  shareholders.  It  is  possible 
that  the  ore  lands  might  be  sold  to  a  subsidiary  company,  and 
the  stock  of  this  company  likewise  distributed  to  the  shareholders. 
The  investor  in  Northern  Pacific,  therefore,  would  be  speculating 
in  these  two  possibilities,  receiving  meanwhile  an  average  return 
of  about  3>4%  on  the  1906  quotations,  with  every  indication  from 
the  enormous  earnings  and  satisfactory  condition  of  the  road  that 
this  dividend  will  be  well  earned  and  continue. 

So  far  as  an  increased  dividend  is  concerned,  the  investor 
will  consider  how  far  the  pronunciamento  of  1 'resident  Hill  is 
likely  to  govern  the  board  of  directors.  Dividends  of  more  than 
7  Jo  are  not  overly  popular  in  Western  States,  so  that  it  is  much 
more  likely  that  the  surplus  earnings  and  assets  of  the  road  will 
be  distributed  some  other  way.  Although  the  memory  of  inves- 
tors is  notoriously  shortlived,  the  recollection  of  the  tremendous 
slump  which  occurred  in  1893-4  has  undoubtedly  militated  some- 
what against  Northern  Pacific,  and  it  is  probable  that  in  1907 
it  was  selling  far  below  the  figure  which  its  tremendous  earnings 
and  enormous  outside  assets  would  amply  justify. 

If  this  is  true,  it  may  be  asked  why  such  a  stock  would  sell 
down  to  $179  per  share  in  so  moderate  a  decline  as  that  of  1906. 
and  to  $115  in  1907.  The  probable  reason  is  that  every  stock 
which  attracts  a  large  speculative  following,  and  is  pretty  clearly 
under  manipulative  influences,  is  liable  to  such  heavy  slump- . 
and  this  is  especially  true  of  Western  roads.  The  investor  will 
probably  conclude  that  such  slumps  arc  liable  to  occur  again, 
and  that  he  is  likely  to  have  opportunities  to  purchase  at  attrac- 
tive figures.  Below  $150  per  share  it  is  pretty  certain  that  North- 
ern Pacific  is  cheap,  even  though  should  any  very  heavy  general 
decline,  like  that  of  1903,  recur,  it  might  sell  considerably  below 
this  figure.  Conditions  in  the  Northwest  have  vastly  changed 
since  the  crash  of  1893 ;  the  country  is  built  up,  its  resources 
have  been  developed,  and  the  earnings  of  the  road  ought  to  prove 
reasonably  stable.  In  some  minds  the  repetition  of  much  such 
a  boom  as  came  in  the  eighties  has  brought  some  legitimate 


NORTHERN  PACIFIC  541 

apprehension,  and  it  is  not  impossible  that  stock  like  the  North- 
ern Pacific  will  show  very  wide  fluctuations  within  the  next  few 
years.  But  the  road  is  now  solidly  entrenched,  where  before 
it  was  built  upon  scantling,  and  the  investor  who  takes  advantage 
of  heavy  slumps  should  they  occur,  and  picks  the  stock  up  for 
safe-keeping,  should  realize  handsome  returns  from  his  holding. 


PENNSYLVANIA  RAILROAD. 

The  Pennsylvania,  as  it  is  familiarly  known,  is  not  only  the 
greatest  railroad  in  America,  but,  in  point  of  traffic  and  earnings, 
the  greatest  in  the  world.  For  the  year  of  1906  its  gross  earnings 
were  nearly  $150,000,000  for  the  Pennsylvania  proper,  and  for  the 
entire  system  nearly  $300,000,000. 

The  operations  of  the  system  are  on  so  enormous  a  scale 
that  we  need  a  standard  of  comparison.  Its  gross  earnings,  for 
example,  are  nearly  equal  to  those  of  the  four  great  "trans-conti- 
mentals" :  the  Southern  Pacific,  the  Atchison,  the  Union  Pacific 
and  the  Northern  Pacific  combined.  For  1906  the  net  earnings 
were  equal  to  those  of  the  Illinois  Central,  the  Burlington,-  the 
St.  Paul  and  the  Chicago  &  Northwestern  combined. 

Tn  point  of  mere  mileage  the  Pennsylvania  is  surpassed  by 
several  other  American  systems.  Directly  it  operates  a  little  less 
than  4,000  miles  of  main  track,  but  the  total  for  the  entire  system 
is  over  11,000,  and  it  has  a  potent  voice  in  the  control  of  nearly 
6.OQ0  miles  more. 

The  total  number  of  tons  carried  by  the  entire  system  in 
1906  was  363,000,000,  or  nearly  one-quarter  of  the  entire  tonnage 
of  the  United  States.  The  mere  increase  for  the  year  of  1906 
over  the  year  preceding  amounted  to  37,000,000,  or  almost  equal 
to  the  entire  tonnage  of  the  New  York  Central  Railroad. 

In  1905  the  total  number  of  tons  carried  one  mile  by  the 
Pennsylvania  Railroad  alone  was  16.885  millions.  This  was  an 
increase  over  1904  of  2,662  million  tons.  Tn  1905  the  Wabash 
Railroad  carried  a  total  of  2,339  million  tons  of  freight  one  mile; 
the  Lackawanna  2.714  million  tons;  the  Delaware  &•  Hudson, 
1,782  million  ions,  and  the  Reading  1,324  million  tons.  In  other 
words,  the  increase  in  ton  mileage  on  the  Pennsylvania  was 
greater  than   the  entire  ton   mileage  of  any   of  the  roads  named. 

'I  nese  figures  are  for  the  Pennsylvania  Railroad  alone.  All 
i  be  lines  of  the  system  carried  in  1905  a  total  Ion-mileage  of  29,- 
503  millions.  This  was  an  increase  of  -1.372  million  tons  per  mile. 
The  mere  increase  was  greater  than  the  entire  ton  mileage  of  the 

(542) 


PENNSYLVANIA  RAILROAD  543 

Union  Pacific,  of  the  North  Western,  of  the  Northern  Pacific,  or  of 
the  Great  Northern  for  the  year  of  1905.  Put  in  a  different  way, 
had  anv  one  of  these  systems  been  added  to  the  Pennsylvania 
system  as  a  new  division,  it  would  not  have  brought  so  great  an 
increase  in  freight  tonnage  as  came  in  the  year  from  the  ordinary 
growth  of  its  business. 

Including  in  its  capitalization  the  stocks  and  bonds  of  its 
leased  and  operated  lines,  the  gross  capitalization  of  the  Penn- 
sylvania proper  exceeds  three-quarters  of  a  billion  dollars,  and 
that  of  the  entire  system  would  bring  the  total  high  above  a 
billion  dollars.  In  this  sense,  the  Pennsylvania  may  be  consid- 
ered to  be  the  only  billion  dollar  railroad  in  existence. 

It  is  a  huge  holding  company  as  well,  having  in  its  treasury 
on  January  1st,  1907,  securities  of  a  book  value  of  $194,000,000, 
yielding  the  road  more  than  6%  on  this  amount.  Accruing  from 
the  sale  of  securities  during  the  year  were  over  $15,000,000  profits, 
of  which  $13,000,000  was  turned  into  the  construction  of  the  New 
York  tunnels. 

The  capital  expenditures  for  the  entire  system  for  the 
past  seven  years  have  been  nothing  short  of  colossal,  being 
between  400  and  500  million  dollars  ;  but  the  results  were  com- 
mensurate with  the  outlay.  In  that  time  the  gross  earnings  of 
the  entire  system  have  nearly  doubled,  rising  from  $152,000,000  in 
1899  to  $296,000,000  in  1906.  The  gross  earnings  of  the  second 
largest  railway  in  the  United  States,  the  Southern  Pacific,  were  in 
1906  only  $105,000,000.  The  increase  in  earnings  for  the  Pennsyl- 
vania Railroad  alone  were  for  the  seven  years,  $76,000,000,  or 
more  than  the  road's  entire  earnings  in  1899  when  President  Cassatt 
took  hold. 

New  York  Central  &  Pennsylvania  Comparisons. 

It  has  often  been  said  that  under  the  Cassatt  administration  the 
Pennsylvania  was  an  extravagantly  run  road,  and  the  investigation 
by  the  Interstate  Commerce  Commission  in  1906,  revealing  the 
existence  of  a  deal  of  small  graft,  produced  a  painful  impression. 
Nevertheless  the  Pennsylvania's  aggressive  policy  has  produced  re- 
sults, as  the  following  interesting  comparisons  with  its  chief  rival, 
the  New  York  Central,  for  the  operations  of  1906,  reveal  : 


5  14  PENNSYLVANIA  RAILROAD 

New  York  Central  Pennsylvania 

Mileage 3,784  ■*        3,896 

Approximate  Net  Capitalization $466,000,000  $577,000,000 

Approx.  Capital  per  mile  of  road  operated  $123,000  $145,000 

Net  Earnings  on  Net  Capital 5.8%  8.1% 

Gross  Traffic  Earnings $92,089,768  $148,239,882 

per  mile $24,336  $37,661 

Increase  (per  mile)  over  1905 8%  <>'  , 

do.                   over  1900 33%  70% 

Freight  Traffic  Density  (ton  miles) 2,226,046  4,742,081 

[Way $2,832  $4,738 

Maintenance  per  mile:  |  Equipment 3,850  6,725 

I.      Total $6,682  $11,463 

Average  Freight  Rate .64c  .64c 

Average  Train  Load 403  tons  529  tons 

Train  Mile  earnings $2 .  59  $3.14 

Fixed  Charges 64%  38% 

Surplus  after  charges $12,275,260  $35,674,300 

Per  cent,  of  Surplus  on  Stock 8.2%  11.6% 

Surplus  App.  for  Imp.— 7  years $16,347,260  £63,652,929 

Average  Price  in  1906 $139  $137 

Dividend  rate  for  year 5£%  Q>\% 

The  per  cent,  of  surplus  for  the  New  York  Central  is  reckoned  on  $149,- 
000,000  of  stock  on  which  dividends  were  paid  during  the  year. 

History 

The  Pennsylvania  is  one  of  the  oldest  railways  of  the  country. 
It  was  originally  chartered  in  1848;  its  main  line,  built  by  the  State 
of  Pennsylvania;  was  opened  in  1854,  and  operated  at  a  loss  until  it 
was  taken  over  by  the  present  company  in  1857.  Prom  this  the  road 
lias  grown  steadily  by  accretion  to  its  present  enormous  dimensions. 
partly  by  leases,  partly  by  absorption,  so  that  it  now  represents  the 
consolidation  of  over  two  hundred  smaller  roads,  the  last  notable 
addition  being  the  Long  Island  Railroad.  Besides  the  roads  leased 
and  operated,  it  owns  outright  or  controls  anil  operates  under  prac- 
tically the  same  management,  the  Philadelphia,  Baltimore  &  Wash- 
ington, the  Northern  Central,  the  West  Jersey  and  Seashore,  and  the 
Pennsylvania  Company. 

The  Pennsylvania  Company  was  chartered  in  1870  for  the  pur- 
pose of  managing,  in  the  interests  of  the  Pennsylvania  Railroad 
Company,  the  various  lines  leased  and  controlled  by  that  company 
west  of  Pittsburg.  It  operates  directly  the  old  Pittsburg.  Fort 
Wayne  and  Chicago  Railroad,  and  owns  a  controlling  interest  in  the 
Pittsburg.  Cincinnati.  Chicago  and  St.  Louis  (known  as  the  "Pan- 
handle" )  :  the  Vandalia  fa  recent  consolidation  of  smaller  lines)  : 
the  Grand  Rapids  and  Indiana,  and  a  number  of  smaller  roads.  The 
Pennsylvania  Railroad  owns  the  entire  stock  of  the  Pennsylvania 
Company  i  $60,000,000). 


PENNSYLVANIA  RAILROAD  545 

The  Pennsylvania  dominates  the  great  centers  of  coal  and 
iron  production  in  the  United  States.  Up  to  recently  it  has  had 
practically  a  monopoly  of  the  Pittsburgh  district,  the  greatest 
freight  traffic  center  in  the  world.  Though  it  is  not,  like  the 
Reading,  the  Lackawanna  and  other  coal  roads,  a  great  holder 
of  coal  lands,  still,  its  coal  properties  are  extensive,  and  it  is  to  be 
ranked  as  one  of  the  great  "coalers." 

The  affairs  of  the  Pennsylvania  were  deeply  involved  in  the 
disastrous  "freight-wars,"  which,  through  the  '80s,  characterized 
the  railroads  of  the  United  States,  and  which  brought  the  Read- 
ing, the  Erie,  the  Baltimore  &  Ohio,  and  so  many  others  to 
bankruptcy  in  1893-6.  It  was  this  which  led  the  Pennsylvania 
to  take  the  lead  in  the  development  of  the  "Community  of  In- 
terest" idea,  which  has  brought  about  a  marked  stability  of  rates 
and  earnings,  and  in  many  cases  a  direct  increase  of  rates. 

The  idea  involved  the  purchase  of  the  stocks  of  other  lines, 
so  as  to  bring  about,  if  not  actual  control,  at  least  an  important 
voice  in  the  management.  The  result  is  that  the  Pennsylvania 
is  now  not  only  the  chief  traffic  road  of  the  country,  but  one  of 
wide  influence.  The  cost  of  the  securities  of  other  lines  which 
it  held,  prior  to  the  extensive  sales  of  1906,  amounted  to  nearly 
a  quarter  of  a  billion  dollars,  or  more  than  the  gross  capitalization 
of  many  important  systems. 

The  Pennsylvania's  largest  single  holding  (partly  through 
the  Pennsylvania  Company),  was  in  the  Baltimore  &  Ohio,  with 
over  four  thousand  miles  of  railroad.  As  on  January  1st,  1906, 
it  owned  71  millions  out  of  the  then  outstanding  184  million  dol- 
lars of  the  capital  stock  of  the  latter  road.  One-half  this  holding 
was  sold  during  the  year  and  acquired  by  Harriman-Union  Pacific 
interests. 

The  Baltimore  and  Ohio,  in  its  turn,  owns,  with  the  Lake 
Shore  (New  York  Central),  half  of  the  "working  control"  of  the 
Reading,  the  Pennsylvania's  most  direct  competitor;  and  the 
Reading  owns  a  controlling  interest  in  the  Central  Railroad  of 
New  Jersey,  another  direct  competitor  of  the  Pennsylvania.  The 
Pennsylvania  owned,  again  with  the  Lake  Shore,  about  half  of 
a  controlling  interest  in  the  Chesapeake  and  Ohio  Railroad,  and 
up  to  late  in  1906  it  likewise  owned  33  millions  out  of  87r4  mil- 
lion dollars  of  the  stock  of  the  Norfolk  and  Western,  practical1 
controlling  that  road,  though  one-half  this  interest  has  been 
disposed  of.  It  also  owns  (through  the  Panhandle)  one-third  of 
36 


546  PENNSYLVANIA  RAILROAD 

the  control  of  the  Hocking  Valley  Railroad,  the  balance  being  dis- 
tributed through  several  roads.  Through  the  Reading  it  is  repre- 
sented on  the  Board  of  the  Lehigh  Valley,  so  that  the  Erie  and 
the  Lackawanna  were  the  only  roads  in  its  more  immediate  terri- 
tory not  more  or  less  under  Pennsylvania's  influence. 

Philadelphia  C&  Erie. 

In  January,  1907,  the  Pennsylvania  completed  arrangements 
for  the  merger  of  the  Philadelphia  &  Erie,  operating  307  miles  of 
track  between  Sunbury,  Pennsylvania  and  Erie,  with  157  miles 
of  double  track.  The  line  was  already  leased  to  the  Pennsylvania 
Railroad  for  999  years,  actual  net  receipts  being  paid  as  rental.  A 
majority  of  the  stock  was  held  by  the  Pennsylvania  Railroad, 
and  an  offer  was  made  to  exchange  the  balance  of  the  outstand- 
ing Philadelphia  &  Erie  common  stock  dollar  for  dollar  for  Penn- 
sylvania Railroad  stock. 

After  liberal  maintenance  charges  the  surplus  for  1906 
showed  10%  for  the  common  stock  and  6%  in  dividends  were 
paid.  It  was  obvious  from  this  that  the  offer  made  by  the  Penn- 
sylvania Railroad  was  amply  justified,  and,  on  the  other  hand, 
it  was  attractive  to  the  shareholders  of  the  Philadelphia  &  Erie. 

When  the  merger  is  completed  this  will  add  307  miles  of 
line  owned  to  the  Pennsylvania  Railroad,  with  gross  earnings  in 
1906  of  $8,342,875,  and  about  the  same  in  1905.  The  exchange 
of  stock  will  add  $10,385,000  to  the  Pennsylvania  Railroad's  stock 
and  $19,823,000  of  indebtedness.  In  1907,  after  liberal  mainte- 
nance charges,  net  earnings  on  the  Philadelphia  &  Erie  showed 
7%  on  its  total  capital,  a  figure  slightly  under  the  showing  for 
the  Pennsylvania  Railroad  for  the  same  year. 

The  Philadelphia  &  Erie  balance  sheet  showed  an  excess 
of  current  assets  over  liabilities  of  about  $700,000,  or,  including 
the  renewal  fund,  of  nearly  $1,000,000.  The  property  was 'obvi- 
ously well  worth  the  purchase  price. 

Ownership. 

The  Pennsylvania  Road  has  the  distinction  of  having  a  larger 
number  of  shareholders  than  any  other  road  in  the  United 
States.  The  number  of  record  in  1905  was  44,175.  It  is  neither 
owned  nor  controlled  by  any  single  individual  or  family,  but  rep- 
resents more  completely  than  any  othe>r  great  road  ownership 
by  the  people. 


PENNSYLVANIA  RAILROAD  547 

From  June  of  1899  to  the  close  of  1906  the  directing  genius 
of  the  Pennsylvania  was  Alexander  J.  Cassatt,  and  to  his  strong 
and  aggressive  personality  the  broad  and  vigorous  policy  of  ex- 
pansion of  the  road  through  these  years  was  due.  Shortly  be- 
fore President  Cassatt's  death,  H.  C.  Frick,  of  Pittsburgh,  was 
chosen  a  director,  and  by  many  was  looked  upon  as  President 
Cassatt's  possible  successor.  Instead,  however,  James  McCrea, 
Vice-President  of  the  Pennsylvania  Company,  at  the  head  of 
the  Pennylvania's  Lines  West,  and  a  close  personal  friend  of  Mr. 
Frick,  was  chosen.  Already  popularly  regarded  as  the  largest 
single  stockholder  in  Reading,  it  is  generally  assumed  that.  Mr. 
Frick  will  have  an  important  voice  in  the  Pennsylvania's  coun- 
cils. As  a  member  of  the  executive  committees  of  the  Chicago 
&  North  Western  and  Union  Pacific,  and  a  director  of  other  lines, 
he  had  already  become  a  powerful  factor  in  railway  affairs, 
being  closely  associated  in  the  public  mind  with  Mr.  Harn'man, 
PI.  H.  Rogers  and  Wm.  Rockefeller ;  and  in  close  association  with 
these  gentlemen  is  the  banking  house  of  Kuhn,  Loeb  &  Co., 
which  acts  as  the  fiscal  agent  of  the  Pennsylvania,  although  its 
head,  Jacob  H.  Schiff,  is  not  a  member  of  the  Pennsylvania  board. 

Through  the  Union  Pacific's  purchase  of  an  extensive  hold- 
ing in  the  Baltimore  &  Ohio  and  likewise  in  the  New  York  Cen- 
tral, the  Harriman  influence  is  added  to  the  already  extensive 
large  holdings  of  the  Standard  Oil  interests  in  the  New  York 
Central  and  the  Lackawanna.  Mr.  Harriman  is  a  director  in  the 
Baltimore  &  Ohio  and  also  in  the  Erie  and  the  Delaware  & 
Hudson,  and  with  Mr.  Frick  in  the  Reading  and  Norfolk  & 
Western,  and  Mr.  Rockefeller  and  Mr.  Stillman  in  the  New  York 
Central,  it  will  be  seen  that  the  leading  interests  in  the  control 
of  the  larger  Eastern  roads  are  becoming  more  closely  associated 
than  ever. 

Besides  Mr.  Frick,  the  Pennsylvania's  directorate  was  made 
up  of  its  four  vice-presidents,  John  P.  Green,  Charles  F.  Pugh, 
Samuel  Rea  and  John  B.  Thayer;  Alexander  M.  Fox,  N.  Parker 
Shortridge,  Clement  A.  Griscom,  Chas.  E.  Ingersoll,  William 
II.  Barnes,  George  Wood,  C.  Stuart  Patterson,  Effingham  B. 
Morns.  Thomas  DeWitt  Cuyler,  Lincoln  Godfrey  and  Rudulph 
Ellis.    All  of  these  are  residents  of  Philadelphia  and  its  environs. 

There  is  no  "largest  single  holder''  known.  It  will  be  seen 
from  this  list  that  there  are  no  "representatives"  of  other  'arge 
roads  on  the  Pennsylvania's  board;  on  the  other  hand,  the  Penn- 


548  PENNSYLVANIA  RAILROAD 

sylvania  interest  is  represented  on  the  boards  of  the  Baltimore 
&  Ohio,  the  Chesapeake  &  Ohio,  the  Norfolk  &  Western  and 
other  roads,  proportionate  to  its  holdings. 

Capitalization. 

Though  the  nominal  capitalization  of  the  Pennsylvania  is 
very  large,  it  directly  owns  but  1.200  miles  of  main  track,  the 
remaining  2,575  miles  being  operated  under  lease  or  as  agent. 
From  this  it  results  that  the  Pennsylvania  pays  a  larger  amount 
annually  in  rentals  than  in  interest  on  its  bonded  debt.  The 
nominal  capitalization,  therefore,  is  far  from  its  true  capitaliza- 
tion, the  stocks  and  bonds  of  its  leased  and  operated  lines  amount- 
ing to  much  more  than  the  nominal  bonded  debt. 

It  would  be  a  very  difficult  task  to  determine  the  actual 
amount  of  this  subsidiary  capitalization,  but  it  may  be  obtained 
approximately  by  the  method  followed  in  this  work,  of  capitaliz- 
ing the  rentals  on  the  basis  of  4%.  The  rentals  paid  in  1906 
amounted  to  $12,346,754.  With  the  sum  obtained  from  the 
capitalization  of  this  amount,  the  capital  account  of  the  Penn- 
sylvania stood  as  follows,  January  1st,  1907: 

Capital   stock $305,951,350 

Funded    debt 191,561,270 

Car   trusts    (net) 45,141,362 

Water   certificates 10,000.000 

Nominal    capital $552,653,982 

Rentals  capitalized  at  4% 278.537.500 

Approx.   gross  capitalization $831,191,482 

Securities    held 254,063.313 

Approx.  net  capitalization $577,128,169 

Approx.  net  capital,  per  mile $145,566 

Average  miles   operated 3,896 

Net  earnings  on  net  capital 8.1% 

Slock  on  net  capitalization 53% 

Fixed  charges  on  total  net  income 38% 

Factor  of    Sa  Eety 62%. 

Included  under  the  item  of  "Securities  held"  were  the  stocks 
and  bonds   of  other   corporations   valued    at  $194,769,719.     The 


PENNSYLVANIA  RAILROAD  549 

balance  comprised  the  sums  due  on  the  sale  of  Norfolk  &  West- 
ern and  Chesapeake  &  Ohio  stocks,  loans  for  construction  10 
subsidiary  companies  and  $28,835,033  charged  to  the  New  York 
Tunnel  extension. 

In  addition  to  its  nominal  capitalization,  the  Pennsylvania's 
guaranties  at  the  close  of  1906  covered  8383,000,000  of  other 
outstanding  securities.  Of  this,  by  far  the  larger  part,  $237,000,- 
000,  was  on  the  lines  west  of  Pittsburgh  and  Erie  and  $22,- 
408,000  was  on  the  refunding  mortgage  bonds  of  the  Long  Island 
Railroad.  This  left  guaranties  to  the  amount  of  $124,000,000,  of 
which  the  larger  part  was  on  lines  leased  or  operated  by  the 
Pennsylvania  Railroad,  and  therefore  forming  a  part  of  the  $278,- 
000,000  capitalization  of  leased  lines,  appearing  in  the  above 
table  and  computed  on  the  basis  of  rentals  paid. 

If  to  this  $383,000,000  of  securities  guaranteed  be  added  the 
nominal  funded  debt  of  the  company,  $191,000,000,  and  the  gross 
amount  of  car  trusts  and  water  certificates  outstanding,  for 
which  the  Pennsylvania  Company  is  primarily  liable,  $81,000,000, 
it  would  appear  that  the  total  of  the  company's  obligations  were 
about  $665,000,000,  while,  if  to  this  be  added  the  further  $60,000,000 
of  notes  sold  in  I;ebruary,  the  total,  early  in  1907,  exceeded  $700,- 
000,000. 

The  dividend  and  interest  payments  on  these  guaranteed 
securities  amounted  in  1906  to  $7,868,529  on  the  Lines  East 
and  $12,292,991  on  the  Lines  West.  The  larger  of  these  guaran- 
ties and  payments  thereon  were  as  follows: 

Long  Island  Railroad $22,408,000        $    896,320 

Philadelphia  &  Erie  RR.  . . .  .  .    16,143,000  798,350 

(   21,240,-100  ) 
United  New   [ersey  stock  .  .     1        '       '     r    }         788.475 

I    ZU,U(JU,UtA     1 

Pennsylvania    Company 130,203,5  IK  4,971,960 

Pittsburg,  Ft.  Wayne  &  Chic.     57,088,785  3,996.215 

It  will  be  seen  that  the  item  of  securities,  carried  at  cost, 

but  actually  worth  much  more,  balanced  within  about  $24,000,000, 

the  sum  derived  from  the  capitalization  of  the  rentals  of  l  :ased 

lines.     The  estimated   net  capitalization,  therefore,   is   not   very 

much  higher  than  the  nominal  amount  of  the  stocks  and  bonds  of 

the  Pennsylvania  proper. 

On   the   basis   of   total    mileage    operated,    the   approximate 

net  capitalization  averaged  $145,566  per  mile.    This  is  about  two 

and  one-half  times  the  average  mileage  capitalization  of  Amen- 


550  PENNSYLVANIA  RAILROAD 

can  loads,  and  is  exceeded  by  but  few  lines.  The  figure  for  the 
Pennsylvania  compares  with  $161,742  for  the  Reading,  the  high- 
est of  an)  of  the  leading  American  roads;  $132,789  for  the  Lacka- 
wanna, $97,241  lor  the  Baltimore  &  Ohio  and  $123,188  for  the 
New  York  Central.  But  the  gross  earnings  per  mile  of  both 
the  Reading  and  the  Lackawanna  are  considerably  higher  than 
the  Pennsylvania's,  while  the  Pennsylvania's  earnings  in  turn 
greatly  exceed  those  of  the  New  York  Central. 

When  the  estimated  net  capitalization  is  compared  with 
the  net  earnings,  the  Pennsylvania  earns  net  8.1%  on  its  capitali- 
zation. This  figure  compares  with  13.7%  for  the  Lackawanna, 
10.8%  for  the  Reading,  7.1%  for  the  Baltimore  &  Ohio,  and 
5.8%  for  the  New  York  Central ;  the  general  average  for  all  Ameri- 
can roads  being  about  6%. 

It  will  be  seen  that  the  Pennsylvania  capitalization,  on  the 
basis  of  earnings,  is  high  as  compared  with  the  Reading  and 
the  Lackawanna,  but  much  below  that  of  the  New  York  Central. 

Style  of  Capitalization. 

But  the  Pennsylvania's  arrangement  of  stocks  and  bonds 
is  such  that  its  Fixed  Charges,  compared  with  its  total  net  income, 
are  low.  If  to  the  $191,561,270  of  funded  debt  of  1906  and  $45,- 
141,362,  the  net  amount  of  outstanding  car  trusts,  were  added 
the  $278,537,500,  estimated  capitalization  of  leased  lines,  on 
the  basis  of  rentals  paid,  we  have  a  total  equivalent  to  a  funded 
debt  of  $515,240,132.  This  amount  stands  against  $305,951,350 
of  stock.  Taking  out  the  value  of  the  securities  held,  trie  stock 
represents  about  a  full  half  of  the  estimated  net  capitalization. 
as  against,  for  example,  only  38%  on  the  New  York  Central. 

From  this  it  results  that  Fixed  Charges,  including  all  rentals, 
consumed  in  1906  only  38%  of  the  total  net  income,  leaving  a 
margin  of  safety  for  the  underlying  securities  of  62%.  This 
figure  compares  with  a  similar  estimate  of  safety  for  the  Read- 
ing's underlying  securities  of  55%  ;  of  62%  for  the  Lackawanna, 
and  of  only  36%  for  the  New  York  Central. 

But  even  this  strong  showing  does  not  correctly  represent 
the  strength  of  Pennsylvania  securities.  First  of  all,  two-thirds 
of  the  rentals  paid  by  the  Pennsylvania  are  on  a  basis  of  the  net 
earnings  of  the  lines  operated,  and  are  to  this  extent  variable  and 
not  fixed.  Excluding  this  item,  the  actual  fixed  charges  of  the 
road   in    1906   were   only    a    little    over    sixteen    million    dollars. 


PENNSYLVANIA  RAILROAD  551 

Even  if  we  add  car  trust  and  sinking  fund  payments,  they  were 
only  a  little  over  twenty  million  dollars.  It  follows,  therefore, 
that  the  total  net  income  of  the  road  could  be  cut  down  at  least 
three-fifths  before  payments  on  its  bonds  and  leases  would 
become  impaired.  The  "Factor  of  Safety"  of  Pennsylvania 
securities  may  be  reckoned  as  in  reality  much  above  60%,  which 
compares  with  a  general  average  for  the  country  estimated  at 
40%. 

Equities  Owned. 

At  the  close  of  1906  the  Pennsylvania  Railroad  held  in  its 
treasury  stocks  to  a  par  value  of  $237,362,917  and  bonds  to  a  par 
value  of  $41,663,602,  or  a  total  of  $279,026,519.  These  securi- 
ties were  carried  on  the  books  at  their  cost,  $194,769,719. 

From  these  securities  the  company  received  in  1906,  $11,- 
741,184,  or  an  average  return  of  6.0%  on  its  investment.  In  addi- 
tion to  this  return  the  company's  equities  were  considerable. 

The  largest  single  item  of  these  holdings  is  $60,000,000  par 
value  of  the  subsidiary  Pennsylvania  Company,  the  entire  capi- 
tal stock.  In  1906  the  net  income  of  the  Pennsylvania  Company 
was  $8,933,888,  nominally  14.8%  on  the  capital  stock,  so  that  the 
company  was  comfortably  earning  its  6%  dividend  and  might 
even  have  paid  7%  and  still  kept  within  the  Pennsylvania's  tradi- 
tional policy  of  a  dollar  for  dividends,  a  dollar  for  improvements. 

The  next  largest  holding  was  $23,490,775,  practically  the 
entire  capital  stock  of  the  Philadelphia,  Baltimore  &  Washing- 
ton, comfortably  earning  considerably  more  than  10%  on  its 
capital  stock  and  paying  4%.    See  that  road. 

Outside  of  stocks  and  bonds  of  the  companies  included  in 
the  Pennsylvania  system,  the  principal  items  were: 

Baltimore  &  Ohio,  common $5,725,000  (par  value) 

"       preferred 14,273,600        "       " 

Norfolk  &  Western  common 6,246,000        "       " 

adjustm't  pfd.  .  3,246,000       "       " 

Long  Island 6,797,900       "       " 


During  the  year  the  Pennsylvania  disposed  of  all  its  holdings  in 
the  Chesapeake  &  Ohio,  $10,130,000,  par  value,  and  the  larger 
part  of  its  holdings  in  the  Baltimore  &  Ohio  and  Norfolk  &  Western, 
so  that  the  balance  remaining  was  very  small  as  compared  with 
the  total  stocks  of  these  two  companies. 


552 


PENNSYLVANIA  RAILROAD 


The  subsidiary  Pennsylvania  Company  at  the  close  of  1906, 
had  securities  carried  on  its  books  at  a  cost  value  of  $222,321,320, 
which  included  chiefly  the  stocks  of  the  Pittsburgh,  Fort  Wayne 
&  Chicago,  the  Pittsburgh,  Cincinnati,  Chicago  &  St.  Louis,  the 
Yandalia,  the  Grand  Rapids  &  Indiana  and  other  companies,  in- 
cluded under  the  designation  of  the  "Lines  West".  Against  these 
securities  was  a  funded  debt,  including  $50,000,000  of  improvement 
notes,  of  $180,203,548. 

On  the  securities  held,  the  Pennsylvania  Company  received 
in  1907,  $7,634,271,  or  an  average  return  on  the  book  valuation 
of  3y2%.  Its  equity  in  the  undistributed  profits  of  its  subsidiary 
companies  was,  however,  considerable. 

The  Pennsylvania  Railroad's  income  of  $11,741,184  from  its 
securities  owned  was  equivalent  to  more  than  3%  on  its  outstanding 
capital  stock,  and  as  this  was  considerably  less  than  the  actual 
earnings  of  these  securities  it  may  be  regarded  as  solid  income. 
The  company  might  therefore  have  ascribed  3%  of  its  7%  dividend 
in  1907  to  dividends  from  investments,  leaving  only  4%  to  be  earned 
by  the  Pennsylvania  Railroad  proper.  The  nominal  surplus  earn- 
ings of  the  railroad  proper  were  in  1906  equal  to  7.8%. 

Increase  of  Capitalization. 

Since  the  accession  of  President  Cassatt  in  June,  1899,  the 
increase  in  the  nominal  capitalization  of  the  road  has  been  very 
heavy.  The  items  for  the  close  of  1899  and  of  1906  compare  as 
follows : 


Year 

Common          Funded 
Stock               Debt 

Total 
Capital 

Securities 
Held 

Gross 
Earnings 

1899. . . 
1906. .  . 

$129,305,500;  $88,144,511 
305,951,350'  191,561,270 

$217,450,011 
497,512,620 

$119,690,736  $72,922,984 
194,769,719   148,239,882 

Increase  over  seven  years:    Total  capital,   129%;    gross  earnings,  103%. 

It  will  be  seen  from  the  above  that  in  the  seven  and  a  half 
years  of  President  Cassatt's  administration,  the  Pennsylvania 
Railroad  proper  considerably  more  than  doubled  both  its  capital 
stock  and  funded  debt.  The  total  increase  of  stocks  and  bonds 
was  $280,000,000.  Against  this,  the  increase  of  securities  owned 
was  $85,000,000,  leaving  a  net  increase  of  stocks  and  bonds  on 
the  road  of  $195,000,000. 


PENNSYLVANIA  RAILROAD  553 

In  1899  the  nominal  amount  of  stocks  and  bonds,  deducting 
securities  owned,  amounted  to  $34,600  per  mile  of  road  operated. 
In  1906  this  sum  had  increased  to  $77,700. 

Earnings,  it  will  he  seen,  did  not  increase  correspondingly 
with  the  nominal  capital,  hut  if  the  capitalization  of  1899  be 
estimated  in  the  same  fashion  as  in  the  preceding  pages,  it  will 
be  found  that  this  anomalous  result  disappears.  The  amount 
paid  as  rentals  on  leased  lines  has  not  greatly  increased  within 
this  period,  and  adding  the  capitalization  of  rentals,  and  deduct- 
ing the  amount  of  securities  held,  the  net  capitalization  of  1899 
was  about  $391,716,000  against  a  similar  estimate  of  $577,128,000 
for  1906. 

The  actual  increase  of  net  capitalization,  therefore,  was  rather 
less  than  50%  as  against  an  increase  in  gross  earnings  in  the 
same  period  of  103%  ;  that  is  to  say,  the  increase  in  earnings  under 
President  Cassatt's  administration  was  actually  much  more  rapid 
than  the  increase  in  the  true  capitalization  of  the  road. 

In  1906  the  subsidiary  Pennsylvania  Company  made  two  loans, 
aggregating  about  $98,000,000  which  amount  was  turned  over  to 
the  Pennsylvania  Railroad  Company  in  exchange  for  $44,218,000 
of  car  trusts,  $10,000,000  of  water  certificates  and  $36,393,432  A]/2% 
collateral  notes  of  the  Oregon  Short  Line  received  from  the  sale 
of  the  Baltimore  &  Ohio  stock.  The  balance  appeared  in  the 
Pennsylvania  Railroad's  balance  sheet  as  an  increase  of  $10,348,838 
in  the  "Pennsylvania  Company  Deposit  Account."  The  item  of 
$10,000,000  water  certificates  appears  in  the  report  of  the  Penn- 
sylvania Company,  but  nowhere  in  the  reports  of  the  Pennsylvania 
Railroad   Company. 

The  reports  of  the  Pennsylvania  have  been  for  years  models 
of  completeness,  and  this  fact  made  it  especially  notable  that  it 
should  be  necessary  to  put  together  two  different  reports  in  order 
clearly  to  understand  so  vital  a  transaction  as  an  increase  of  about 
$64,000,000  in  capital  obligations  in  a  single  year.  With  reference 
to  this,  the  following  memorandum  was  furnished  by  the  company, 
in  response  to  a  note  of  inquiry : 

Car  Trusts,  Etc.,  As  Capital  Obligations. 

"The  Pennsylvania  Railroad  Company  does  not  take  the  car 
trust  certificates  as  an  obligation  upon  its  balance  sheet,  for  the 
reason  that  these  certificates  are  not  issued  by  the  Company  but 
are  issued  by  a  Trust  Company.     The  principal  of  the  certificates 


554  PENNSYLVANIA  RAILROAD 

represents  the  cost  of  the  equipment,  which  is  leased  tc  The  Penn- 
sylvania Railroad  Company,  and,  under  the  terms  of  that  lease,  the 
equipment  is  all  paid  for  in  ten  years.  The  holder  of  the  certificates 
retains  a  lien  upon  the  equipment  until  all  of  the  instalments  of 
principal  are  paid. 

"The  same  reasoning  applies  to  the  water  certificates ;  these 
are  not  issued  by  The  Pennsylvania  Railroad  Company  but  are 
issued  in  like  manner  by  a  Trust  Company,  and  the  principal  of 
the  certificates  is  paid  off  in  fifteen  years  through  proportionate 
annual  payments;  the  result,  of  course,  in  each  case  being,  that 
when  the  car  trust  certificates  are  fully  paid,  the  equipment  becomes 
the  property  of  The  Pennsylvania  Railroad  Company  just  as  the 
reservoirs,  pipes,  and  other  property  representing  a  water  plant 
becomes  the  property  of  the  Railroad  Company  when  all  the  water 
certificates  are  paid. 

"The  Pennsylvania  Railroad  Company  has  pursued  a  con- 
servative policy  in  charging  these  expenditures  against  its  surplus 
income,  and  not  into  the  capital  account. 

"In  regard  to  the  issues  of  the  Pennsylvania  Company  obliga- 
tions, the  Pennsylvania  Company  is  simply  a  bureau  of  The  Penn- 
sylvania Railroad  Company,  which  owns  every  share  of  its  capital 
stock ;  and  fi  »r  the  same  reason  that  the  Pennsylvania  Railroad 
Company  takes  charge  of  the  issue  of  the  car  trusts  certificates 
to  cover  additional  equipment  furnished  to  all  its  lines  both  East 
and  West  of  Pittsburgh,  it  feels  itself  entirely  at  liberty  when  short 
term  securities  have  to  be  issued  to  use  the  Pennsylvania  Company 
for  that  purpose,  or  to  use  The  Pennsylvania  Railroad  Company,  as 
ii  may  prefer.  Of  the  $98,000,000  of  securities  of  the  Pennsylvania 
Company  referred  to,  $50,000,000  were  temporary  obligations  which 
mature  November  1st,  1907,  and  to  meet  which  the  Pennsylvania 
Company  now  has  on  hand  the  Oregon  Short  Line  notes  and  other 
securities  received  from  the  Pennsylvania  Railroad  Company;  the 
balance  of  $48,000,000  represents  its  French  Franc  Loan,  and  with 
the  proceeds  of  that  loan  it  has  purchased  from  the  Pennsylvania 
Railroad  Company  car  trust  and  water  supply  certificates,  which 
will  be  paid  for  in  instalments  and  will  thus  furnish  the  Penn- 
sylvania Company  with  the  capital  that  it  needs  for  a  great  deal 
of  its  construction  work  West  of  Pittsburgh. 

"One  of  the  objects  in  view  when  the  Pennsylvania  Company 
was  organized  was  to  enable  it  to  do  just  the  things  for  which  the 


PENNSYLVANIA  RAILROAD  555 

Pennsylvania  Railroad  Company  is  now  using  it;  and  in  granting 
its  charter  the  State  gave  it  certain  exceptional  privileges  which 
are  not  possessed  by  The  Pennsylvania  Railroad  Compan)  under  its 
charter.  It.  is,  therefore,  of  special  value  to  The  Pennsylvania 
Railroad  Company  for  this  reason,  and  as  the  reports  of  the  two 
Companies  state  these  transactions  very  clearly,  it  is  not  thought  that 
any  obscurity  or  misapprehension  can  exist  in  reference  thereto." 

Community  of  Interest  Results. 

It  is  very  interesting  to  compare  the  conditions  which  ob- 
tained when  President  Cassatt  took  hold  of  the  road  in  1899, 
and  inaugurated  the  famous  "Community  of  Interest"  idea.  In 
that  year  the  earnings  per  ton  mile  of  the  Pennsylvania  (and 
likewise  for  all  the  roads  of  the  country  generally)  had  sunk  to 
the  lowest  point  in  its  history.  For  the  Pennsylvania  the  rate 
was  .47c.  In  1906  this  had  increased  to  .59c.  This  is  a  24% 
increase,  and  on  the  18,500  millions  of  tons  moved  one  mile  on 
the  Pennsylvania,  meant  a  difference  of  22  million  dollars  in  the 
gross  earnings  for  1906.  This  is  just  one-fifth  of  th ■:  total  freight 
earnings  for  the  year. 

Not  all  of  this  gain,  however,  was  saved.  There  was  at 
the  same  time  a  heavy  increase  in  the  average  expenses  per 
ton  mile,  but  the  average  net  earnings  per  ton  mile  rose  from  .13c. 
to  .18c.  This  is  a  46%  increase,  nearly  one-half.  The  freight 
traffic  of  the  Pennsylvania  represents  three-quarters  of  its  earn- 
ings, so  that  the  difference  in  rates  between  1899  and  1906  meant 
a  difference  in  net  earnings  on  the  Pennsylvania  of  about  $9,500,- 
000.  This  is  equivalent  to  nearly  3%  on  the  capital  stock  and 
was  27%  of  the  net  surplus  available  for  dividends  and  improve- 
ments for  the  year. 

In  other  words,  were  the  Pennsylvania  with  its  present  capital 
and  charges  operating  under  the  same  conditions  as  1899,  it 
could  scarcely  have  paid  its  present  dividend.  Indeed,  if  it  were 
held  to  its  policy  of  setting  aside  large  sums  for  improvements 
from  earnings,  it  could  not  pay  much  over  4  or  5%. 

It  is  easy  to  understand  how  deeply  the  Pennsylvania,  as 
well  as  other  roads  of  its  class,  is  interested  in  the  preservation 
of  present  conditions.  A  fall  of  15%  in  the  gross  earnings  of  the 
road  which  1899  rates  would  mean,  would  cut  very  heavily  into 
its  profits. 


556 


PENNSYLVANIA  RAILROAD 
Character  of  Traffic. 


Of  the  total  tonnage  of  the  Pennsylvania  in  1906,  about 
10'/  was  anthracite  coal,  and  nearly  a  full  third  was  bituminous 
coal.  Coal  and  coke  together  formed  51%  of  the  traffic.  The 
largest  other  item  was  iron  and  steel,  which  amounted  to  about 
1-/^%.  The  balance  was  made  up  of  miscellaneous  traffic,  of 
which  the  products  of  agriculture  were  small.  Six  years  earlier 
coal  and  coke  formed  about  57%  of  the  traffic,  so  that  the  im- 
portance of  this  item  has  slightly  declined,  while  that  of  mis- 
cellaneous traffic  has  increased. 

Stabili/y  of  Traffic. 

The  gross  earnings  of  the  road  in  ten  years  have  shown  a 
steady,  and  latterly  a  very  marked,  increase,  so  that  with  only  a 
little  more  than  half  as  much  mileage,  its  gross  earnings  have  more 
than  doubled.  In  this  period  the  gross  earnings  per  mile,  as  the  fol- 
lowing table  shows,  have  shown  an  increase  for  each  year,  with  the 
single  exception  of  1904.  The  recovery  in  1905  was  very  rapid, 
and  for  1906  the  increase  was  equally  large,  ranging  above  12%. 
The  showing  for  1 1  years  follows : 


Year 

Miles  Operated 

Gross  Earnings     Per  Mile 

1896 

1897 

1898 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

2,787 
2,813 
2,821 
2,847 
3,243 
2,671 
3,638 
3,656 
3,820 
3,839 
3,896 

$62,096,503      $22,280 

64,223,113       22,830 

65,603,738       23,220 

72,922,985       25,719 

88,539,827       26,716 

101,329,795       27,602 

112,663,330       30,968 

122,626,419       33,541 

118,145,270       30,928 

133,921,992       34,512 

148,239,882       37,661 

Maintenance. 

The  traffic  density  of  the  Pennsylvania  is  among  the  largest 
of  any  of  the  great  roads  of  the  country.  It  is  more  than  double 
that  of  the  New  York  Central  and  about  five  times  that  of  the 
New  Haven.  The  expenditures  for  maintenance  are  correspond- 
ingly heavy,  amounting  in  1906  to  over  $11,000  per  mile  operated. 

This  is  undoubtedly  very  liberal  maintenance  and  could,  in 
case  of  necessity,  be  considerably  curtailed,  probably   by   10  or 


PENNSYLVANIA  RAILROAD 


557 


20%,   without   seriously  affecting   the  road.     A   curtailment   of 
10%  would  be  equivalent  to  about  1.3%  on  the  capital  stock. 

The  items  for  the  seven  full  years  in  which  President  Cassatt 
directed  the  fortunes  of  the  company  compare  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 
per  Mile 

Way 

Equipment 

1900 

3,676,432 
3,458,554 
3,855,238 
4,061,330 
3,722,881 
4,398,316 
4,742,081 

$3,407 
3,449 
3,831 
3,989 
3,348 
3,868 
4,378 

$4,072               $7,479 
4,126                   7.575 

1901 

1902 

4,882 
5,417 
5,171 
6,232 

8,713 
9,406 

1903 

1904 

8,519 

1905 

10,100 

1906 

6,725 

11,103 

Average.  . . . 

4,130,690 

$3,752 

$5,232 

$8,984 

Miles  of  extra  main  track,  2,015. 


Lackawanna .  . 

Reading 

Lehigh  Valley . 

Erie 

N.  Y.  Central. 


3,079,629 
3,420,895 
2,771,846 
2,434,819 
2,096,289 


8,333 
8,215 
6,017 
5,077 
5,910 


It  will  be  seen  that  although  the  Pennsylvania's  charges  have 
been  heavy,  they  have  not  been  as  high,  traffic  considered,  as  some 
of  its  neighbor  roads.  With  more  than  33%  heavier  traffic,  its 
average  expenditures  for  the  six  years  were  only  slightly  above 
the  Lackawanna's.  The  average  traffic  density  for  the  New  York 
Central  was  only  half  that  of  the  Pennsylvania,  yet  its  average 
maintenance  charges  for  the  period  were  $5,910  per  mile,  as  against 
the  Pennsylvania's  $8,984. 

In  other  words,  the  Pennsylvania,  with  its  heavy  charges,  has 
simply  been  pursuing  a  policy  that  has  been  general  among  pros- 
perous roads  all  over  the  country,  and  while  these  appropriations 
probably  conceal  some  considerable  earnings,  they  could  not  be 
heavily  reduced  and  the  standard  of  the  road  kept  up,  unless  such 
reductions  were  general  on  competing  lines. 

Improvements. 

But  these  charges  represent  only  a  part  of  the  very  large 
sums  which  have  been  spent  on  the  Pennsylvania  from  earnings 
since  the  beginning  of  the  Cassatt  administration.  In  addition  to 
the  ordinary  maintenance  charges  the  following  sums  have  been 


558  PENNSYLVANIA  RAILROAD 

written  off  the  surplus  and   turned  back  into  the  improvement  of 
the  road  within  the  period  named : 

1899 $3,495,559 

1900 7,090,329 

1901 10,824,595 

1902 12,500,000 

1903 9,472,728 

1904 6,220,922 

1905 8,842,881 

1906 8,701,474 

Total $67,148,488 

This  is  equivalent  to  $17,217  per  mile  of  road  operated.  This 
is  nothing  like  so  large  as  the  Lackawanna's  appropriations, 
and  does  not,  as  in  the  latter  case,  amount  to  practical  recon- 
struction of  the  road ;  but  it  is  nevertheless  a  very  large  figure ; 
for  example,  more  than  four  times  that  of  the  New  York  Central. 

Very  considerable  payments  have  likewise  been  made  on  car 
trusts  and  sinking  funds  from  earnings,  which  since  1900  have 
been  as  follows : 

1900 $506,036 

1901 2,009,236 

1902 2,002,984 

1903 3,240,848 

1904 3,836,909 

1905 3,563,651 

1906 4,503,165 

Total $19,662,829 

This  with  the  sum  appropriated  for  improvements  makes  a  total 
of  upwards  of  $86,000,000  of  earnings  turned  back  into  the  road 
within  eight  years. 

Within  the  same  period  $110,000,000  was  paid  to  the  stock- 
holders in  cash  dividends.  The  difference  between  the  two 
amounts  is  considerable,  but  there  were  various  other  payments, 
so  that  the  Pennsylvania  under  President  Cassatt  fairly  well 
maintained  its  traditional  policy  of  "a  dollar  for  dividends,  a  dol- 
lar for  improvements." 


PENNSYLVANIA  RAILROAD  559 

Dividend  Record. 

The  Pennsylvania  enjoys  the  distinction  of  having  paid  con- 
tinuous dividends  for  a  longer  period  than  any  other  American 
road,  and  since  1860,  for  forty-seven  years  it  has  never  gone 
through  a  single  year  without  the  payment  of  a  dividend.  In 
this  period  it  has  paid  out  upwards  of  $270,000,000  in  cash  to  its 
shareholders.    The  record  from  1871  is  as  follows : 

1871-4 10% 

1875-6 8% 

1877 4% 

1878 2% 

1879 4y2% 

1880 6%  and  1%  in  scrip 

1881 8% 

1882-3 8y2% 

1884 7% 

1885-6 5% 

1887 sy2% 

1888-9 5% 

1890 sy2% 

1891-2 6% 

1893-9 5%  yearly 

1900-6 6%  yearly 

1907 7% 

Surplus  Earnings. 

Even  under  its  policy  of  liberal  maintenance,  the  Pennsylvania 
has  always  earned  much  in  excess  of  its  dividend  payment.  The 
following  table  shows  the  "Margin  of  Safety"  for  dividends  under 
President  Cassatt's  administration.  The  average  per  cent,  of  sur- 
plus on  common  stock  was  10.5%  as  against  5.8%  on  dividends  paid. 
The  Factor  of  Safety  on  dividends  of  the  eight  years,  therefore,  has 
been  regularly  above  50%. 

Towards  the  close  of  1906  the  stock  was  put  on  a  7%  basis 
through  the  payment  of  a  regular  semi-annual  dividend  of  Zl/2%. 
This  brought  the  dividend  rate  for  the  year  up  to  6l/2%  and  called 
for  a  disbursement  of  $19,900,000  out  of  a  total  surplus  shown  of 
$35,700,000.  In  1905  the  6%  dividend  consumed  $18,000,000  out  of 
the  surplus  shown  of  $30,000,000,  so  that  the  company  was  ap- 
parently better  able  to  pay  a  7%  rate  in  1906  than  a  6%  rate  in  1905. 


560 


PENNSYLVANIA  RAILROAD 


Year 

Surplus 

Per  cent. 

Earned  on 

Common 

Dividends 

Paid  on 

Common 

Average 
Price 

1899 

1900 

1901 

1902 

1903 

$11,493,801 
17,277,530 
22,194,330 
27,321,687 
27,506,507 
27,990,866 
30,102,516 
35,674,300 

8.8 

11.4 

10.9 

13.4 

9.3 

9.3 

9.9 

11.6 

10.5 

5 

6 
6 
6 
6 
6 
6 

128 
133 
142 
148 
129 

1904 

123 

1905. . 

142 

1906 

6^                   137 
5.8 

The  full  7fo  dividend  in  1907  requires  a  disbursement  of 
upwards  of  $21,000,000,  and  is  the  largest  dividend  payment  of  any 
railway  in  the  world. 

The  Balance   Sheet. 

In  the  report  for  1906,  the  balance  sheet  is  made  up  in  more 
detail  and  a  distinct  gain  of  information  afforded.  For  example, 
the  very  considerable  and  very  vague  item  of  miscellaneous  assets, 
amounting  to  $18,921,933  is  largely  sorted  out  and  reduced  in  1906 
to  a  figure  much  more  in  keeping  with  a  policy  of  clearness  and 
publicity. 

Excluding  materials  on  hand,  the  sheet  shows : 

Current  Assets   of $67,910,502 

Current  Liabilities  of 35,368,060 


Leaving  a  working  balance  of $32,542,442 

Not  included  in  current  liabilities  was  an  item  of  $13,709,163, 
deposit  account  of  the  Pennsylvania  Company.  Inasmuch,  how- 
ever, as  the  latter  company  is  quite  solvent  and  all  its  stock  is 
owned  by  the  Pennsylvania  Railroad  Company,  the  matter  is 
largely  one  of  bookkeeping. 

The  item  of  cash  on  hand  and  on  deposit  amounted  to  $43,- 
170,122  and  it  is  to  be  noted  that  there  was  an  additional  item 
included  in  the  current  assets,  of  accounts  receivable  from  the 
sale  of  the  Norfolk  &  Western  and  Chesapeake  &  Ohio  stocks  of 
$15,492,685.  This  item  has  already  been  grouped  under  the 
securities  held  in  the  estimate  of  capitalization,  bul  H  is  really 
a  quick  asset  and  may  properly  be  entered  as  such.  It  will  be 
seen,  therefore,  that  the  company  was  well  provided  with  cash 
?nd    working    capital,    the    increase    in    cash    over    the    balance    of 


PENNSYLVANIA  RAILROAD  561 

the  previous  year  being  upwards  of  $16,000,000.  In  a  company 
carrying  on  tremendous  expenditures  for  improvements  as  is  the 
Pennsylvania,  these  items  have  less  significance  however,  than 
otherwise. 

The  balance  to  the  credit  of  profit  and  loss  at  the  close  of  the 
year  was  $24,725,484. 

Car  Trusts. 

Not  showing  on  the  general  balance  sheet,  as  is  customary, 
were  outstanding  car  trust  certificates  at  the  close  of  the  year  of 
$71,018,000  on  the  94,873  cars  obtained  under  these  trusts.  About 
one-third  were  sublet  to  subsidiary  companies,  so  that  the  net 
actually  chargeable  against  the  Pennsylvania  Railroad  was  $45,141,- 
362,  which  is  the  amount  included  in  the  estimate  of  capitalization 
here  given. 

The  total  payment  on  these  car  trusts  for  the  year  was  $8,679,- 
397,  of  which  amount  $5,320,397  was  paid  by  the  Pennsylvania  Rail- 
road and  the  balance  by  its  subsidiary  companies.  This  included 
both  interest  and  principal. 

The  Pennsylvania  is  one  of  the  few  roads  of  high  standing 
which  resorts  to  car  trusts  as  a  means  of  securing  equipment.  This 
method  is  generally  significant  of  poverty  and  poor  credit.  It 
amounts  to  the  same  as  buying  furniture  on  the  installment  plan, 
which  is  usually  expensive.  But  the  amount  which  these  car 
trusts  add  to  the  total  indebtedness  of  the  Pennsylvania  is  com 
paratively  small. 

Investment  Value. 

The  Pennsylvania  was  put  on  a  6%  basis  in  the  first  year  of 
President  Cassatt's  administration.  So  it  remained  until  the  close 
of  1906,  when  the  rate  was  advanced  to  7%.  As  a  6%  stock  the 
Pennsylvania  had  fluctuated  between  a  high  point  of  170  in  Septem- 
ber of  1902  to  a  low  point  of  110  in  the  winter  of  1903-4.  In  the 
recovery  of  1905  it  sold  up  to  148.  As  a  7%  stock  the  highest 
quotation  was  145  and  within  5  months  thereafter,  at  the  beginning 
nf  1907,  sold  down  below  115. 

This  was  a  violent  fall  for  a  stock  of  the  solid  investment  value 
of  the  Pennsylvania  and  meant  that  the  stock  was  selling  on  a  6% 
basis,  a  point  it  had  not  reached  since  1891,  when  on  a  6%  dividend 
Pennsvlvania   sold    down   to  99.     Even   in    1893,    when   the    Penn- 


562  PENNSYLVANIA  RAILROAD 

sylvania  reached  bedrock,  it  sold  down  to  only  93,  on  a  5%  basis. 
The  price  of  1907  was,  therefore,  relatively  the  lowest  point  for 
Pennsylvania  in  16  years.  Undoubtedly  this  was  due  in  part  to  the 
prevailing  rates  for  money,  still  more  to  the  enormous  outpour  of 
Pennsylvania  securities  under  the  Cassatt  administration  and  partly 
to  a  doubt  as  to  the  wisdom  of  the  7%  dividend  under  existing  con- 
ditions. 

At  the  close  of  1906  there  were  outstanding  $20,000,500  of  the 
3y2%  10-year  bonds  convertible  at  140,  and  .$99,624,500  of  the 
3^4  %  10-year  bonds  convertible  at  150.  The  effect  of  the  full 
conversion  of  these  bonds  would  be  to  add  $80,950,000  to  the  stock 
capital  of  the  road  and  this  on  a  7%  basis  would  call  for  $5,667,000 
in  dividends  as  against  about  $4,200,000  fixed  charges  on  the  3y2% 
bonds— an  increase  of  nearly  $1,500,000.  This,  added  to  the  $3,000,- 
000  required  for  each  added  1%  dividend  on  the  existing  stock 
would  mean  a  total  increase  of  dividend  disbursements  of  about 
$4,500,000,  or  an  increase  of  a  full  25%  over  the  charges  on  the 
same  securities  in  1906. 

It  was  understood  that  large  amounts  of  these  bonds  had  been 
taken  by  syndicates  and  that  when  in  the  fore  part  of  1906  Penn- 
sylvania found  itself  in  need  of  further  funds  in  a  tight  money 
market,  the  declaration  of  a  7%  dividend  was  insisted  upon  by 
the  banking  interests  in  order  that  they  might  unload  their  sup- 
ply of  convertibles.  If  this  was  a  fact,  the  plan  was  not  a  suc- 
cess. Conversion  of  the  1912  bonds  into  7%  stock  at  140  would 
mean  a  flat  rate  of  5%,  and  on  the  1915  bonds  at  150,  of  4.46%,  a 
gain  over  the  previous  yield  of  43%  and  32%,  respectively.  But 
in  the  face  of  the  opportunity  to  increase  the  interest  return  to 
this  very  considerable  extent,  up  to  January  1st,  1907,  practically 
no  further  conversion  of  the  bonds  had  taken  place,  and  in  March 
of  1907  the  bonds  sold  at  the  lowest  price  in  their  history. 

The  case  is  an  illustration  of  the  fact  that  with  careful  and 
intelligent  investors,  it  is  earnings  and  not  dividends  which  deter- 
mine values  and  a  misjudged  increase  of  the  dividend  may  lower, 
rather  than  raise  the  price  of  a  security. 

Nevertheless,  if  the  fall  in  the  price  of  Pennsylvania  stock  in 
1907  meant  anything  more  than  that  the  price  of  best  railway  securi- 
ties, standard  stocks,  was  at  that  time  tending  towards  a  6% 
basis,  it  would  seem  that  this  was  a  case  of  serious  misjudgment 
on  the  part  of  investors.  It  has  already  been  pointed  out  that 
the   Pennylvania's   income   from   its  investments   was  equivalent 


PENNSYLVANIA  RAILROAD  563 

in  1906  to  about  3%  on  its  outstanding  capital  and  that  in  these 
securities  were  very  considerable  equities,  sufficient  to  make  the 
return  a  solid  one.  The  company  has  then  to  earn  only  6  or  8% 
from  its  actual  operations  as  a  carrier  to  comfortably  pay  an  addi- 
tional 3  or  4%,  and  still  have  ample  funds  to  devote  to  improve- 
ments. 

It  has  been  pointed  out  in  the  discussion  of  maintenance, 
that  the  Pennsylvania's  items  have  been  very  heavy,  and  while 
with  the  rise  in  prices  of  labor  and  materials  the  amount  of  con- 
cealed earnings  here  ma)'  not  be  large,  it  is  fairly  certain  that 
under  any  drastic  set-back  of  business,  labor  and  materials  would 
fall  in  prices  sufficient  to  give  the  road  a  considerable  margin 
for  retrenchment  in  this  quarter.  It  would  seem,  therefore,  that 
nothing  short  of  such  a  storm  as  broke  over  the  country  in  '57 
could  seriously  impair  the  Pennsylvania's  investment  value,  and 
unless  the  high  interest  rates  of  1906-7  continue,  as  scarcely  seems 
probable,  Pennsylvania  on  or  somewhere  near  a  6%  basis  would 
seem  a  very  attractive  purchase. 

The  New  York  Tunnels. 

Probably  no  single  undertaking  of  President  Cassatt's  has 
tended  more  to  weight  the  stock  of  the  Pennsylvania  than  the 
tunnel  extension  from  the  Jersey  shore  into  New  York  City  and 
the  purchase  of  terminals  in  the  heart  of  Manhattan,  at  naturally 
a  very  heavy  expense.  Yet  this  extension  is  a  part  of  the  bold 
and  far-sighted  project  which  will  immeasurably  strengthen  the 
I  'ennsylvania  and  undoubtedly  earn  dividends  on  whatever  out- 
lav  this  extension  involves,  even  though  it  should  exceed  one 
hundred  millions  of  dollars. 

Before  this  work  was  begun  the  terminals  of  the  Pennsyl- 
vania, the  chief  railroad  in  America,  in  their  relations  to  New 
York,  the  chief  city  of  America,  were  very  much  the  same  as  if 
the  New  York  Central  were  to  stop  oh  the  hither  side  of  the 
Harlem  River.  Simply  by  tunnelling  under  the  Hudson  and 
obtaining  a  direct  entrance  for  its  trains  into  the  city,  the  Penn- 
sylvania will  largely  increase  its  passenger  traffic  and  practi- 
cally force  its  rivals  on  the  Jersey  shore  to  the  same  undertaking- 
By  obtaining  control  of  the  Long  Island  Railroad,  and  by  continu- 
ing its  tunnels  under  Manhattan  and  under  the  East  River,  it  will 
be  able  to  run  its  passenger  trains  through  to  the  seaside  places  of 
Long  Island  without  change.     Ami  yet  again,  by  the  construction 


564  PENNSYLVANIA  RAILROAD 

of  the  bridge  over  the  East  River,  connecting  its  lines  with  the 
New  Haven  terminals,  it  will  be  able  to  run  its  trains  through 
from  Boston  to  the  farthest  parts  of  its  system.  With  the  lines  of 
the  Boston  &  Maine  absorbed  by  the  New  Haven,  the  alliance  of  the 
New  Haven  and  the  Pennsylvania  would  naturally  tend  to  become 
much  closer. 

The  predicted  decadence  of  New  England's  industries  has 
not  yet  arrived,  and  with  a  through  freight  route  from  its  chief 
manufacturing  centers  to  the  west  and  south,  via  the  Pennsyl- 
vania's lines,  New  England  will  be  in  a  better  position  than  ever 
to  meet  the  steadily  growing  competition  of  manufacturing  in 
other  centers.  All  this  must  inevitably  contribute  to  the  Penn- 
sylvania's traffic  and  to  solidify  the  position  of  that  road  as  the 
great  goods  carrier  of  America. 

In  the  report  of  1906  it  is  stated  that  $13,000,000  was  charged 
off  from  the  profit  derived  from  the  sale  of  Baltimore  &  Ohio  and 
other  securities  during  the  year,  and  devoted  to  the  cost  of  the 
tunnel  extension.  The  sum  of  $5,000,000  was  similarly  charged  off 
for  premiums  in  1903,  and  $5,000,000  more  in  1905,  which 
amounts  are  to  be  added  to  the  $28,835,033,  the  amount  at  which 
the  tunnels  were  carried  on  the  balance  sheet  of  1906,  making 
a  total  of  $51,835,033  representing  the  total  expenditure  on  the 
tunnels  to  the  close  of  1906.  It  is  evident  that  with  the  rise  in 
materials  and  labor  and  some  engineering  difficulties  encountered 
in  the  East  River  tunnels,  the  cost  of  this  work  will  considerably 
exceed  anticipations,  but  at  the  outside,  it  can  scarcely  involve 
the  expenditure  of  more  than  one  hundred  millions,  and  it  would 
be  surprising  if,  after  deducting  the  cost  of  ferriage  which  these 
tunnels  will  save,  the  road  could  not  comfortably  earn  net  7  or 
8%  on  this  sum.  The  cost  of  transfers  and  reshipment  is  always 
large  and  the  saving  that  will  be  effected  in  these  items  will  be 
considerable,  while  the  stimulus  to  traffic  which  these  extensions 
will  afford  should  be  sufficient  easily  to  make  up  the  balance  of 
charges. 

Tin-  steady  growth  of  Xew  York  City,  like  that  of  London 
and  other  s:reat  centers,  makes  it  clear  that  an  enormous  business 
will  inevitably  accrue  to  the  roads  which  will  put  themselves 
in  a  position  to  handle  this  traffic  at  the  lowest  possible  cost. 
Whatever  may  be  the  result  of  the  first  few  years,  it  is  scarcely 
to  be  doubled  thai  ilie  Xew   York  extension  will  in  time  be  looked 


PENNSYLVANIA  RAILR<  >AD  565 

upon  as  one  uf  the  master  strokes  of   President   Cassatt's  bold 
polio  . 

The   Convertibles. 

Under  the  high  interest  rates  prevailing  in  1906  and  1(|07, 
the  1912  convertibles,  exchangeable  at  140,  sold  down  in  1907  as 
low  as  94  and  the  convertibles  of  1915,  exchangeable  at  150, 
slightly  below  90.  At  these  low  figures  the  conversion  price  was 
equivalent  to  132  and  135,  respectively.  It  scarcely  seems  prob- 
able that  high  interest  rates  are  a  permanence  and  with  the 
return  to  the  normal  level  of  previous  years,  there  seems  little 
doubt  that  Pennsylvania  stock  will  tend  to  sell  above  150.  To  the 
investor  who  is  willing  to  wait,  therefore,  it  would  appear  that  at 
anything  like  these  figures,  these  convertibles  are  an  attractive 
purchase  and  that  eventually  they  should  yield  a  handsome 
profit  to  their  holders. 


THE  PENNSYLVANIA  COMPANY. 

The  Pennsylvania  Company  is  simply  a  subsidiary  operating 
company  for  the  Pennsylvania  Railroad,  and  its  entire  capital 
stock  is  owned  by  the  latter.  It  controls  all  the  Pennsylvania 
lines  west  of  Pittsburg,  and  it  is  in  addition  a  huge  holding  com- 
pany. The  total  of  securities  owned  is  carried  on  the  books  of  the 
i  iupany  at  $232,000,000.  This  includes  controlling  interests  of  a 
Number  of  companies  subsidiary  to  the  Pennsylvania,  and  in  addition 
large  interests  in  the  Baltimore  &  Ohio,  the  Cambria  Steel  Com- 
pany, the  Pennsylvania  Steel  Company,  the  Norfolk  &  Western,  etc. 

Within  latter  years  the  company  has  earned  a  handsome 
surplus,  but  prior  to  this  time  it  was  not  a  source  of  great  profit 
to  the  parent  company.  In  22  years  it  has  shown  a  nominal 
deficit  five  times,  even  before  meeting  its  interest  charges.  In 
24  years  it  has  paid  a  dividend  in  only  ten,  and  the  average  return 
to  the  parent  road,  on  its  stock,  for  this  period  was  only  about 

1.5%. 

History. 

The  Pennsylvania  Company  was  chartered  by  the  Legisla- 
cure  of  Pennsylvania  in  1870,  and  began  operating  in  the  year 
following,  taking  over  the  lines  owned  and  leased  by  the  Penn- 
sylvania railroad,  west  of  Pittsburgh.  The  principal  of  these 
was  the  old  Pittsburgh,  Fort  Wayne  and  Chicago.  In  1905  the 
capitalization  of  the  company  was  increased  from  $40,000,000  to 
$60,000,000. 

The  main  line  of  the  Pennsylvania  Company  extends  from 
Pittsburgh  to  Chicago,  and  in  1906  it  directly  operated  1,410 
miles.  It  directly  controls  the  Pittsburgh,  Cincinnati,  Chicago 
and  St.  Louis  (1,429  miles),  the  Vandalia  (777  miles),  the  Grand 
Rapids  and  Indiana  (574),  and  a  number  of  minor  companies  (792 
miles).  In  1906  the  total,  including  mileage  operated  under  track- 
age rights,  was  5,048  miles. 

The  entire  capital  stock  being  held  by  the  Pennsylvania  Rail- 
road Company,  the  directors  are  simply  representatives  of  that 
line. 

(566) 


PENNSYLVANIA  COMPANY  567 

Capitalization. 

It  is  somewhat  difficult  to  arrive  at  the  true  capitalization  of 
the  Pennsylvania  Company  for  it  directly  owns  no  track;  in  other 
words,  it  is  simply  a  leasing  company. 

In  1906,  including  the  rentals  paid  on  roads  operated  on  a 
basis  of  net  earnings,  the  company  paid  rentals  of  $9,287,879  as 
against  $4,014,568  interest  on  its  funded  debt.  On  the  other 
hand,  it  received  in  dividends  and  interest  from  its  investments 
$7,634,271.  The  latter  sum  was  equivalent  to  about  3.4%  on  the 
book  valuation  of  the  securities  owned. 

Obviously  if  the  rentals  be  capitalized  on  the  basis  of  4%,  in 
pursuance  of  the  plan  of  this  book,  while  the  securities  owned  be 
taken  at  the  book  valuation  of  the  company,  the  latter  being 
largely  securities  of  leased  and  operated  companies,  the  result 
would  be  to  lower  the  actual  capitalization.  The  estimate  which  fol- 
lows, therefore,  is  only  a  rough  approximation.  As  of  January 
1st,  1907,  it  would  stand: 

Common  stock $60,000,000 

Funded    Debt 130,203,548 

Notes    50,000,000 

Total    Capital $240,203,548 

Rentals  capitalized  at  4% 232,195,000 

Approx.   gross   capitalization $472,398,548 

Securities  held 222,321,320 

Approx.  net  capitalization $250,077,228 

Approx.  net  capit.  per  mile $177,359 

Average  miles  operated 1410 

Net  earnings  on  net  capital 5.8% 

Stock  on  net  capitalization 24% 

Fixed  charges  on  total  net  income 62% 

Factor   of   Safety 38% 

It  will  be  seen  that  on  this  estimate  the  net  capitalization 
per  operated  mile  is  very  high,  especially  as  compared  with  other 
roads  in  the  same  territory.  It  stands  against  a  similar  estimate 
of  $78,987  per  mile  for  the  Lake  Shore,  $69,150  for  the  Wabash 
and  $101,311  for  the  Panhandle. 


568  PENNSYLVANIA  COMPANY 

On  this  estimate  of  the  net  capitalization  net  earnings  show 
only  5.8%  as  against  6.6%  for  the  Panhandle,  3.9%  for  the 
Wabash  and  12.7%  for  the  Lake  Shore. 

It  will  be  seen  that  the  proportion  of  stock  to  the  estimated 
net  capital  is  small — only  about  24%.  It  is  easy  to  see,  there- 
fore, that  fixed  charges,  including  rentals  would  be  high,  amount- 
ing in  1906  to  62%,  leaving  a  factor  of  safety  of  about  38%.  This 
is  just  reversing  the  proportions  shown  by  the  parent  Pennsyl- 
vania Railroad. 

The  gross  capitalization  for  1906  showed  a  very  heavy  in- 
crease, amounting — all  told— to  about  $118,000,000.  Of  this, 
however,  $105,844,645  was  increase  in  the  securities  owned  by  the 
company.  The  larger  part  of  the  new  capital  was  turned  over  to 
the  Pennsylvania  Railroad,  in  return  "for  car  trust  and  water 
certificates  and  other  securities  of  an  amount  substantially  equal 
to  the  obligations  incurred."  The  only  apparent  reason  for  this 
curious  bit  of  financing  was  to  make  less  obvious  the  Pennsyl- 
vania Railroad's  actual  increase  of  about  $64,000,000  in  capital 
obligations.  As  noted  in  the  analysis  of  the  parent  company,  the 
item  of  $10,000,000  water  trust  certificates  appearing  in  the  re- 
ports of  the  Pennsylvania  Company  was  nowhere  to  be  found  in 
the  reports  of  the  Pennsylvania  Railroad  Company. 

Equities  Owned. 

The  total  par  value  of  the  stocks  and  bonds  owned  by  the 
Pennsylvania  Company  at  the  close  of  1906  was  $277,488,639, 
carried  on  the  books,  as  already  noted,  at  a  valuation  of  $222,- 
321,320.  Of  these  securities  there  was  deposited  as  collateral 
under  the  various  mortgages  and  trust  obligations,  stocks  of  a 
par  value  of  $146,775,650,  leaving  about  $130,000,000  of  stocks  free 
in  the  treasury. 

The  principal  items  in  these  holdings  were: 

Baltimore   &  Ohio,  Pfd $5,000,000 

Baltimore   &   Ohio,   common 13,451,200 

Cambria    Steel    Company 22,504,100 

Grand  Rapids  &  Indiana  Ry 2,902,600 

Ore.  Short  Line  Ay2  Collateral  Notes 36,393,432 

Norfolk   &  Western,    Pfd 5,000,000 

Norfolk  &  Western,  common 1.500,000 

Pitts.,  Cin.,  Chic.  &  St.  L.,  pfd 22,470,700 

Pitts.,  Cin.,  Chic.  &  St.  L.,  common 14,587,500 

Pennsylvania  Steel  Company,  common 7,388,900 

Pennsylvania    Terminal    Ry    Co 100,000 


PENNSYLVANIA  COMPANY  569 

Pitts.,  Ft.  Wayne  &  Chic,  guaranteed  special....  33,443,400 

Vandalia     R.    R.    Co 11,633,400 

Pennsylvania   Trust   Certificates 2,700,000 

Pennsylvania    Gold    Certificates 9,300,001) 

Pennsylvania    Improvement    Certificates 10,000,000 

Pennsylvania    Equipment    Certificates 22,218,000 

Pennsylvania    Water   Supply    Certificates 10,000,000 

The  holdings  in  B.  &  O.  preferred  increased  by  about  $2,- 
404,600  and  in  the  Pittsburgh,  Ft.  Wayne  &  Chicago,  guaranteed 
special,  by  $3,029,300. 

The  value  of  the  B.  &  O.  holdings  have  increased  very  con- 
siderably since  their  purchase  and  likewise  large  holdings  in  the 
Panhandle  in  1906  earned  about  12%  on  its  common  stock,  above 
the  preferred  dividend.  The  Cambria  Steel  stock  received  3%  in 
1906,  the  Pennsylvania  Steel,  preferred,  7%. 

The  $36,000,000  of  Oregon  Short  Line  notes  was  the  balance 
of  the  amount  received  by  the  Pennsylvania  Railroad  Company 
on  the  sale  of  its  B.  &  O.  holdings  and  turned  over  to  the  Penn- 
sylvania Company  in  exchange  for  cash. 

The  3.4%  on  the  book  valuation  of  these  securities,  repre- 
sented by  the  $7,634,271  income  received  in  1906,  does  not  fairly 
represent  the  actual  income  from  these  securities  since  on  $54,- 
218,000  of  securities  received  from  the  Pennsylvania  Railroad 
during  the  year,  and  included  in  the  above  amount  at  their  face 
valuation,  the  Pennsylvania  Company  received  nothing  during 
the  year ;  and  likewise  nothing  on  the  Oregon  Short  Line  notes. 
Deducting  these  various  amounts,  the  income  of  1906  would 
represent  about  5.7%  on  the  book  valuation  of  the  balance,  indi- 
cating that  these  securities  are  carried  on  the  books  at  consider- 
ably under  their  market  price. 

Character  of  Traffic. 
The  Pennsylvania  Company's  passenger  traffic  for  1906 
amounted  to  only  about  15%  of  its  gross  earnings;  in  other 
words,  it  is  largely  a  freight  line.  Of  the  freight  traffic  about 
one-third  is  made  up  of  bituminous  coal  alone,  and  coal  and  coke 
make  up  about  45%,  a  slightly  lower  proportion  than  on  the 
Pennsylvania  Railroad.  Shipments  of  ores  are  large,  so  that  mine 
products  make  up  about  65%  of  the  total. 

Stability  of  Earnings. 
With  a  small  increase  in  mileage,  the  gross  earnings  of  the 
Pennsylvania  Company  in  ten  years  have  increased  enormously; 


570 


I'KNNSYLVANIA  COMPANY 


the-  earnings  per  mile  having  more  than  doubled  within  this 
period.  The  increase  for  1905  was  especially  extraordinary,  but 
was  nearly  equalled  in   1906,  as  the  following  table  reveals : 


Year 

Miles  Operated 

Gross  Earnings           Earnings 

per  Mile 

1896 

1,225 
1,225 
1,225 
1,225 
1,357 
1,396 
1,430 
1,526 
1,526 
1,389 
1,410 

$17,414,432                $13,399 

1897 

18,615,700 
19,561,400 
22,986,827 
25,407,562 
29,054,545 
33,025,648 
36,602,935 
36,390,582 
40,596,439 
46,036,806 

15,195 

1898 

15,968 

1899 

18,601 

1900 

1901 

18,723 
20,812 

1902 

23,094 

1903 

23.986 

1904 

23,846 

1905 

29,232 

1906 

32,650 

Community  of  Interest  Results. 

In  1899  the  average  freight  earnings  per  ton  mile  were  .51c. 
In  1905  they  were  .60c,  an  increase  of  nine-tenths  of  a  mill.  This 
on  the  company's  total  ton  mileage  represented  a  difference  of 
$5,413,300  in  the  gross  earnings  of  1906.  This  was  11%  of  the 
gross  earnings.  The  average  net  earnings  for  the  same  period 
increased  by  half  a  mill  per  ton  mile,  equivalent  to  $3,000,000  of 
clear  gain  to  the  company.  This  is  33%  of  the  total  surplus  in- 
come shown  for  the  year.  In  other  words,  under  the  conditions 
of  six  years  before,  the  company  could  pay  3%  on  its  capital  stock 
with  rather  less  ease  than  it  paid  6%  in  1906. 

Maintenance. 

With  this  large  increase  of  business  the  traffic  density  and  main- 
tenance charges  have  likewise  shown  a  heavy  increase,  as  the 
following  table  shows : 


Traffic]Density 

Maintenance  per  Mile 

Total 
per  Mile 

Year 

Way 

Equipment 

1901 

1902 

1903 

1904 

2,713,100 
2,855,660 
2,897,684 
3,023,221 
3,724,795 
4,263,587 

$3,209 

3,056 

P  2,845 

2,518 

3,855 

£4,402 

3,635 
3,975 
3,820 
4,619 
5,531 

$6,464 
6,691 
6,820 
6,338 

1905 

8,474 

1906 

9,933 

,    , 

Average. . . . 

3,246,341 

$3,314 

$4,139 

$7,453 

Miles  of  extra  main  track,  815. 


PENNSYLVANIA  COMPANY  571 


Panhandle.  ..  .  2,193,454  2,567 

4,308 


Lake  Shore...  3,102,370 

Penn.  R.  R.  .  .  4,139,690 


3,680  6,247 


3,752 


4,093 
5,232 


8,401 

8,984 


It  will  be  seen  that  in  six  years  the  traffic  density  increased 
about  60%  and  maintenance  charges  in  almost  the  same  proportion. 
Even  allowing  for  the  increased  cost  of  materials  and  supplies,  it 
will  be  seen  that  the  standard  of  maintenance  of  1906  was  fully  up 
to  that  of  previous  years :  and  this  standard  has  always  been  very 
high.  There  is  little  question  that  the  maintenance  charges  of 
nearly  $10,000  per  mile  in  1906  was  so  large  that  it  might  be  very 
considerably  curtailed  in  less  prosperous  times  without  injury  to 
the  property.  It  was  nearly  equal  to  the  average  maintenance  of 
the  Pennsylvania  Railroad,  while  the  traffic  density  of  the  latter  is 
considerably  higher  and  passenger  business  much  greater. 

Improvements  from  Earnings. 

Even  after  these  high  maintenance  charges,  considerable  sums 
have  been  set  aside  from  surplus  earnings  for  improvements,  as 
follows : 

1900 $1,000,000 

1901 1,000,000 

1902 2,000,000 

1903 3,000,000 

1904 2,000,000 

1905 2,000,000 

1906 2,767,990 

Total $13,767,990 

The  item  for  1906  included  $267,999  paid  on  account  of  princi- 
pal of  car  trusts,  but  similar  payments  in  previous  years  are  not 
shown. 

Surplus  Earnings. 

After  the  liberal  maintenance  charges,  but  before  charging  off 
the  special  appropriations  tabled  above,  funds  available  for  divi- 
dends over  a  series  of  years  have  been  as  follows : 


'-72  PENNSYLVANIA  COMPANY 


Per  cent 

Year 

Surplus 

Earned  on 

Dividends 

Average 

Stock 

Paid 

Price 

1899 

$2,146,931 

5 . 3 

1900 

2,119,603 

5.2 

— 

All 

1901 

3,681,261 

9.2 

3 

owned 

1902 

5,783,984 

14.4 

3 

by 

1903 

5,119,641 

12.7 

4 

Pennsyl- 

1904  

5,187,930 

12.9 

5 

vania 

1905 

6,322,421 

15.8 

5 

Railroad 

1906 

8,933,888 

14.9 

6 

The  surplus  shown  for  1905  is  the  revised  surplus  given  in 
the  report  of  1906,  with  the  $267,990  car  trust  payments  added. 
Previously  this  item  has  been  included  in  the  fixed  charges.  The 
percentage  earned  on  the  stock  shown  for  1905  is  that  calculated  on 
the  $40,000,000  of  stock  which  was  actually  outstanding  throughout 
the  whole  of  the  year,  while  the  percentage  for  1906  is  calculated 
on  the  $60,000,000  of  stock  outstanding. 

Tt  will  be  seen  that  the  dividend  payments  were  less  than  half 
of  the  surplus  shown. 

Dividend  Payments. 

Over  a  series  of  years  the  dividend  have  been  as  follows : 

1883 4% 

1884-91 nil 

1892-4 4 

1895-00 nil 

1901-2 3 

1903 4 

1904-5 5 

1906 6 

The  Balance  Sheet. 

Excluding  from  current  assets  the  item  of  materials  on  hand, 
according  to  the  policy  of  this  book,  but  including  about  $10,000,000 
due  from  leased  and  other  companies  for  betterments  and  advances. 

Current  Assets  showed $41,330,711 

Current   Liabilities 15,146,516 

Leaving  a  working  balance  of $26,184,195 


PENNSYLVANIA  COMPANY  573 

This  large  balance  includes,  however,  miscellaneous  assets, 
nature  not  indicated,  to  the  amount  of  $7,816,300.  The  various 
items  of  cash  totaled  $19,096,251  and  the  credit  to  balance  of  profit 
and  loss  at  the  close  of  the  year  $7,839,743. 


The  Pennsylvania's   Equity. 

As  the  Pennsylvania  Railroad  owns  the  entire  amount  of  the 
Pennsylvania  Company's  capital  stock,  the  two  companies  are  to 
all  intents  one.  The  debt  of  the  one  company  to  the  other  was, 
therefore,  more  or  less  a  mere  item  of  bookkeeping. 

Included  in  the  subsidiary  company's  current  assets  was  $13,- 
709,163  on  deposit  with  the  Pennsylvania  Railroad,  which  sum 
would  be  of  course  deducted  from  the  Pennsylvania  Company's 
working  balance  in  considering  the  parent  company's  interest 
therein. 

Even  had  it  kept  to  a  strict  half-for-dividends-half-for-improve- 
ments  policy,  the  Pennsylvania  Company  might  have  paid  its  parent 
7%  during  the  year,  or  an  additional  $600,000;  and  unquestionably 
the  Pennsylvania's  interest  in  the  equity  represented  by  large  im- 
provements and  heavy  maintenance  charges  is  large.  As  has  been 
shown,  however,  in  the  case  of  the  Lake  Shore,  it  would  be  absurd 
to  consider  that  the  entire  amount  of  surplus  earned  would  be  readily 
available  to  the  holding  companies  in  case  of  need.  Without  doubt 
the  maintenance  charges  on  the  Pennsylvania  lines  West  could 
have  been  very  materially  lower  in  1906  than  they  were,  and  this 
difference  returned  to  the  holding  company  in  dividends.  But  it  is 
the  expectation  of  American  roads  that  they  shall  not  merely  be 
maintained  in  equal  condition  from  year  to  year,  but  that  they  shall 
be  put  in  shape  to  meet  the  constantly  expanding  business — further, 
that  a  considerable  part  of  these  improvements  shall  be  paid  for 
from  earnings.  In  view  of  all  this,  the  estimate  of  enormous 
equities  in  the  earnings  of  subsidiary  lines  which  are  sometimes 
figured  for  the  Pennsylvania  and  similar  holding  companies  are 
absurd. 

It  is  manifest  that  in  its  Lines  West  the  Pennsylvania  Railroad 
has  properties  of  very  rapidly  increasing  value,  and  that  it  could 
probably  have  drawn  from  the  Pennsylvania  Company's  surplus 
earnings  perhaps  a  million  dollars  more  in  the  highly  prosperous 
year  of  1906  than  it  did,  without  curtailing  the  liberal  standard  of 
maintenance  and  improvements. 


PERE  MARQUETTE  RAILROAD. 

The  Pere  Marquette  is  notable  as  having  been  a  part  of  the 
only  large  railroad  system  in  the  country  to  pass  into  the  hands 
of  a  receiver  in  the  highly  prosperous  period  of  1900-1906.  The 
company  had  been  organized  in  1899  for  the  purpose  of  consoli- 
dating the  Flint  &  Pere  Marquette,  the  Detroit.  Grand  Rapids  & 
Western,  and  the  Chicago  &  West  Michigan  Railway;  and  two 
smaller  roads  were  acquired  or  leased. 

In  December,  1902,  a  syndicate,  consisting  of  Thomas  H. 
West  and  John  F.  Shepley  of  the  St.  Louis  Union  Trust  Co., 
F.  H.  Prince  of  Boston,  G.  H.  Norman,  Newman  Erb,  Nathaniel 
Thayer,  Mark  T.  Cox,  B.  P.  Cheney.  T.  Jefferson  Coolidge, 
Thomas  F.  Ryan  and  others  acquired  a  controlling  interest  and 
F.  H.  Prince  was  made  president.  In  1903  the  Take  Erie  & 
Detroit  River  Railway,  226  miles,  was  taken  over,  and  trackage 
rights  secured  over  the  Michigan  Central  into  Buffalo,  extending 
the  line  easterly  from  Detroit  to  the  latter  point. 

In  1904  the  Cincinnati.  Hamilton  &  Dayton  secured  control 
and  leased  the  property,  the  Pere  Marquette  having  previously 
acquired  the  entire  stock  of  and  leased  a  new  line,  the  Chicago, 
Cincinnati  &  Louisville.  The  whole  was  t<>  form  what  was  to  be 
known  as  the  Great  Central  System.  In  December,  1905,  Judson 
Harmon,  of  Cincinnati,  was  appointed  receiver  for  the  combined 
roads,  and  the  Chicago.  Cincinnati  &  Louisville  returned  to  the 
vendors.  The  full  story  of  the  purchase  and  receivership  is  told 
under  the  heading  of  the  Cincinnati,  Hamilton  &  Dayton. 

In  1906  the  Pere  Marquette  operated  a  total  of  2.3^8  miles, 
lying  mainly  in  the  State  of  Michigan. 

The  directorate  for  1905,  the  year  previous  to  the  receiver- 
ship, included  Eugene  Zimmerman,  then  President  of  the  Cincin- 
nati, Hamilton  &  Dayton;  James  XT.  Wallace,  of  the  Central 
Trust  Co.,  New  York:  George  W.  Young,  then  President  of  the 
United  States  Mortgage  &  Trusl  Co.;  George  M  dimming,  his 
successor;  Richard  N.  Young,  Arthur  Turnbull,  Alfred  Skitt, 
Rudolph  Kleybolte,  of  Kleybolte  &  Co..  Bankers;  \V.  R.  Cross, 
Frederick  L.   Eldridge,  of  the  Knickerbocker  Trust  Co.;  Thomas 

(574) 


PERE  MARQUETTE  575 

H.  Tracy,  W.  C.  MacMillan,  then  United  States  Senator  from 
Michigan:  Wm.  Alden  Smith,  later  United  States  Senator  from 
the  same  State,  and  Russell  Harding,  President  of  the  Pere  Mar- 
quette. 

The  executive  committee  consisted  of  Eugene  Zimmerman, 
James  N.  Wallace,  F.  E.  Eldridge  and  Richard  N.  Young.  The 
executive  committee  was  the  same  as  that  of  the  C.  IT.  &  D. 
for  that  year,  and  the  directorate  largely  the  same. 

In  1906.  after  control  of  the  road  had  passed  to  the  Morgan 
interests,  the  directorate  included  George  W.  Perkins,  of  J.  P. 
.Morgan  &  Co.,  Chairman  of  the  Board;  F.  D.  Underwood,  Presi- 
dent of  the  Erie;  president  Chas.  Steele,  of  J.  P.  Morgan;  George 
!■'.  Baker,  president  of  the  First  National  Bank;  George  W. 
Young,  Norman  B.  Beam,  J.  G.  McCullough,  G.  A.  Richardson, 
W.  R.  Gross  and  E.  TT.  llarriman,  with  three  vacancies. 

In  1905  the  road  reported  1,984  shareholders. 

Capitalization. 

\s  of  June  30th,  1906,  the  capital  account  of  the  road,  not 
including  the  S3,500,000  collateral  trust  bonds,  issued  in  purchase 
of  the  stock  of  the  Chic,  Cin.  &  Louisville,  then  in  litigation, 
stood  as  follows : 

Common    stock $16,000,000 

Preferred    stock 12,000,000 

Total    slock $28,000,000 

Funded  debt  (including  leased  lines,  net)  .  .  49,993,292 

Equip,  oblig.   (including  leased  lines,  net)  .  4,708,000 

Receiver    certif 1,619,180 

Total   capital $84,320,472 

Rentals  capitalized  at  4% 19,170,000 

Approx.  gross  capital $103,490,472 

Securities    held 6,142,414 

Approx.   net   capital $97,348,058 

Approx.  net  capital,  per  mile $40,595 

Average   miles   operated 2,398 

Net  earnings  on  net  capital 3.6% 

Stock  on  net  capital 30% 

Fivcd  rhar^cs  on  total  net  income  (estimated)  108% 


576 


PERE  MARQUETTE 


In  1906  the  Pere  Marquette  paid  in  rentals  $766,849,  which, 
capitalized  after  deducting  securities  held,  left  an  estimated 
net  capitalization  of  $40,495  per  mile,  on  a  road  earning  $5,600 
per  mile.  The  net  earnings  for  the  year  showed  only  3.6%  on 
the  estimated  net  capitalization,  a  figure  that  is  indicative  of  the 
high  capitalization  of  the  road.  For  the  fiscal  year  of  1905  the 
road  showed  a  deficit  of  $22,430,  and  for  1906  under  the  receiver- 
ship of  $860,947.  This  was  against  a  nominal  surplus  of  $1,290,- 
549  for  the  fiscal  year  of  1904.  The  reasons  for  this  appear  in  the 
following  analysis  of  the  charges  for 

Maintenance. 

For  six  and  a  half  years  the  comparison  of  traffic  density 
and  maintenance  charges  was  as  follows : 


Year 


Traffic    Density 


Maintenance  per  Mile 


Way 


1900 

1901 

1902 

1903 

(1903-4) 

190-1-5 

1905-6 

Average.  .  .  . 

Lake  Erie  &  W 

Wabash 

Gr.  Rap.  &  In. 


351,089 
430,380 
495,658 
512,647 
(487,388) 
551,421 
677,378 


$747 
863 
809 
586 

(538) 
720 
678 


Equipment 

$575 

564 

568 

494 
(493) 

650 

791 


Total 


$1,322 
1,427 
1,377 
1,080 

(1,031) 
1,370 
1,469 


503,096 


$733 


$607 


$1,340 


592,307 
880,032 
501,035 


999 
1,332 
1,110 


733 
1,370 

983 


1,732 
2,702 
2,093 


It  will  be  seen  from 'the  above  that  in  the  fiscal  year  of 
1904  maintenance  of  way  amounted  to  only  $538  and  equipment 
to  $493,  a  total  of  $1,031.  on  a  road  with  a  freight  traffic  density 
of  about  500,000  ton  miles.  The  total  maintenance  for  the  previ- 
ous year  was  only  $1,080.  It  will  be  seen  from  the  table  above 
that  the  average  maintenance  of  the  Lake  Erie  &  Western  for  a 
period  of  six  years  was  about  $700  per  mile  higher  than  that  of 
the  Pere  Marquette  for  these  two  years,  and  that  of  the  Grand 
Rapids  &  Indiana.  $1,000  per  mile,  respectively  70%  and  100% 
higher,  on  roads  with  something  like  the  same  traffic  density.  It  is 
safe  to  say  that  the  undercharge  for  the  two  years  under  view  was 
at  least  from  $400  to  $500  per  mile,  and  this  on  the  average  mileage 
operated  would  have  been  sufficient  to  wipe  out  the  larger  part  of 
the  nominal  surplus  shown. 


PERE  MARQUETTE 


577 


As  further  indication  of  the  condition  of  the  road,  it  is  to  be 
noted  that  in  1905,  with  an  increase  in  gross  earnings  of  $1,236,- 
728,  there  was  an  increase  in  the  cost  of  conducting  transporta- 
tion of  $1,040,000,  indicating  that  the  costs  of  operation  in  the 
previous  year  had  been  cut  to  the  bone.  Operating  expenses 
in  1905  showed  a  total  increase  of  $2,198,973  over  1904,  with  the 
result  noted  that  with  a  fair  increase  in  earnings  the  operation 
showed  a  deficit  for  the  year. 

Surplus  and  Earnings. 

From  the  organization  of  the  road,  earnings  have  shown  as 
follows : 


Year 


1900.... 
1901.... 
1902.... 
1903. . . . 
1904-5*. 
1905-6. . 
1906  .  .  . 


Miles  Operated 

Gross  Earnings 

Per  Mile 

1,821 

$  8,296,111 

$4,555 

1,838 

9,201,175 

5,003 

1,828 

9,955,375 

5,445 

2,109 

11,356,436 

5,385 

2,171 

11,430,691 

5,264 

2,380 

12,667,420 

5,322 

2,398 

13,430,169 

5,599 

In  the  same  period  the  surplus  shown  was  as  follows: 

1900 $646,189 

1901  734,575 

1902 993,137 

1903 1,616,678 

1903-4   1,290,549 

1904-5    Deficit  22,430 

1905-6    Deficit  860,947 

The  4%  on  the  preferred  stock  was  paid  up  to  and  including 
1905.  The  dividends  for  the  latter  year  were  paid  out  of  the 
profit  and  loss  account,  and  helped  to  swell  the  loss  which  that 
account  showed,  as  below. 

The  Balance  Sheet. 

The  balance  sheet  for  June  30th,  1905,  just  previous  to  the 
purchase  of  the  road  by  the  Morgan  interests  and  the  subsequent 
receivership,  showed  as  follows : 


37 


578  PERE  MARQUETTE 

Current   assets $2,676,203 

Deferred    assets 683,287 

Total    assets $3,359,490 

Current    liabilities $4,456,857 

Deferred    liabilities 1,032,936 

Total    liabilities $5,489,793 

Leaving  a  debit  balance  of $2,130,303 

The  item  of  cash  on  hand  was  $299,938  and  the  profit  and  loss 
account  showed  a  debit  balance  of  $504,498. 

On  June  30th,  1906,  the  balance  sheet  showed: 

Current   assets $2,777,038 

Deferred    assets 218,921 

Total    assets $2,995,959 

Current   liabilities $4,495,856 

Deferred    liabilities 1,510,094 

Total    liabilities $6,005,950 

Leaving  a  debit  balance  of $3,009,991 

There  was  cash  on  hand  of  $599,075  and  the  balance  to 
debit  of  profit  and  loss  had  grown  to  $1,495,490. 

There  had  been  issued  under  the  receivership  receiver  certi- 
ficates to  the  amount  of  $1,619,180.  Of  this  $1,200,000  was 
issued  partly  for  payment  of  back  taxes  of  the  Pere  Marquette 
Railroad,  levied  by  the  State  of  Michigan,  and  for  a  long  time 
in  litigation. 

Condition. 

For  the  fiscal  year  of  1906,  of  which  seven  months  had  been 
under  the  receivership  of  Judson  Harmon,  the  company  showed 
on  practically  the  same  operated  mileage  an  increase  of  $762,- 
749  in  gross  earnings  and  $745,432  increase  in  net  earnings.  In 
other  words,  practically  all  of  the  increase  in  gross  was  saved 
to  net  earnings.  Operating  expenses,  therefore,  decreased  from 
78.3%  in  1905  to  74%  in  1906. 


PERE  MARQUETTE  579 

Analysis  of  the  operating  expenses  shows  that,  while  main- 
tenance charges  increased,  the  cost  of  conducting  transportation 
decreased  $280,000.  This  was  in  face  of  an  increase  in  freight 
carried  of  310.000,000  ton  miles,  or  about  22%,  and  in  the  face, 
likewise,  of  a  decline  in  the  average  rate  per  mile  from  .69c.  to  .60c. 

Revenue  freight  per  train  mile  increased  from  251  to  311 
tons,  and  the  average  haul  from  157  to  171  miles.  The  increase 
of  freight  earnings  per  train  mile  was  from  $1.73  to  $1.85. 

During  the  year  96  miles  of  new  85-lb.  steel  rail  was  laid, 
69  miles  of  sidings  and  yard  tracks  were  built,  and,  during  the 
year,  a  contract  was  entered  into  with  the  Canadian  Pacific  for 
joint  terminal  facilities  at  Windsor,  Ont.,  providing  for  a  good 
and  independent  crossing  of  the  Detroit  River,  between  Detroit 
and  Windsor.  Ontario.  Additions  and  improvements  for  the 
year  amounted  to  $750,908,  and  50  new  locomotives,  150  freight 
cars,  41  passenger  cars,  and  53  work  cars  were  added  to  the 
equipment  of  the  road. 

This  was  a  very  remarkable  showing  and  revealed  the 
splendid  management  of  the  road  under  Receiver  Harmon's 
hands.  Had  it  not  been  for  an  increase  of  $782,000  in  taxes, 
the  larger  part  of  which  was  back  taxes,  $316,000  in  added  in- 
terest charges,  and  of  $205,000  in  added  rentals,  a  total  of  $1,303,000, 
the  road  would  have  earned  a  surplus  of  nearly  half  a  million 
dollars.  As  back  taxes  in  excess  of  this  latter  sum  were  paid 
during  the  year  and  charged  against  income,  it  is  evident 
the  property  for  the  fiscal  year  of  1906  just  about  earned  its 
fixed  charges,  even  with  the  considerable  increase  in  taxes  under 
the  Michigan  law.  the  constitutionality  of  which  has  now  been 
confirmed. 

It  is  evident,  therefore,  that  if  the  floating  debt  could  have 
been  funded  at  a  low  rate  of  interest,  the  road  might  have  been 
taken  out  of  the  hands  of  the  receiver,  and  had  it  not  been  for 
the  condition  of  the  money  market  through  the  fiscal  years  of 
1906-7  this  undoubtedlv  would  have  been  done. 


PEORIA  AND  EASTERN  RAILWAY. 

The  Peoria  &  Eastern  operates  352  miles  eastward  from  Peoria 
through  Indianapolis  to  Springfield,  Ohio.  It  is  a  subsidiary  of 
the  Big  Four,  which  owns  a  majority  of  the  stock,  and  is  therefore 
a  part  of  the  Vanderbilt  system.  The  Board  of  Directors  is  con- 
trolled in  the  Vanderbilt  interest.  As  of  January  1st,  1907,  the 
principal  items  of  interest  were  as  follows : 

Capital    Stock $10,000,000 

Funded    Debt 13,985,100 

Total $23,985,100 

Gross  Earnings  for  1906 3,059,281 

Per   Mile 8,691 

Operating  Ratio 68% 

Nominal    Surplus $172,800 

For  a  number  of  years  operating  expenses  have  been  consider- 
ably surcharged.  In  1906  on  a  freight  traffic  density  of  1,044,860 
ton-miles  the  maintenance  charges  were,  for  way  and  structures, 
$1,123  per  mile,  and  for  maintenance  of  equipment,  $1,214.  This 
was  a  slight  reduction  from  the  previous  year. 

If  the  amount  charged  to  operating  expenses  for  new  con- 
struction, etc..  be  added  to  the  nominal  surplus  shown,  the  com- 
pany earned  about  3%  on  its  capital  stock.  No  dividends  have 
been  paid  for  a  number  of  years. 

The  Big  Four  guarantees  the  interest  on  the  company's  bonds, 
except  the  income  bonds.  The  road  is  a  one-quarter  owner  of  the 
Peoria  &  Pekin  Union  Railroad. 


(580) 


PHILADELPHIA  AND  ERIE  RAILROAD. 

The  Philadelphia  &  Erie  consists  of  a  line  from  Sunbury,  Penn- 
sylvania, northwesterly  to  Erie,  operating  307  miles  in  all,  with  157 
miles  of  double  track.  This  road  was  leased  to  the  Pennsylvania 
Railroad  for  999  years,  actual  net  receipts  being  paid  as  rentals. 

As  of  January  1st,  1907,  the  principal  items  of  interest  were: 

Common    stock $7,985,000 

Special  Guaranteed  stock 2,400,000 

Total $10,385,000 

Funded    Debt 19,823,000 

Total $30,208,000 

Gross  Earnings  ( 1906) 8,342,875 

Net   Earnings 2,169,635 

Per  cent,  on  capital 7.0% 

Surplus   973,484 

The  surplus  of  1906,  after  payment  of  7°/o  on  the  special  guar- 
anteed stock  was  equivalent  to  10%  on  the  common  stock.  The 
surplus  of  1905  was  $1,255,630.  In  1906  the  common  stock  fluctu- 
ated between  $64  and  $73  per  $50  share. 

As  of  January  1st,  1907,  the  Pennsylvania  Railroad  owned  all 
of  the  $2,400,000  special  stock,  $3,499,800  or  nearly  one-half  of 
the  common  stock  and  $3,944,000  of  the  general  mortgage  bonds. 

In  January,  1907,  the  Pennsylvania  Railroad  offered  to  ex- 
change the  balance  of  the  outstanding  common  stock  dollar  for 
dollar  for  Pennsylvania  Railroad  stock,  and  the  offer  to  merge  the 
line  with  the  Pennsylvania  Railroad  Company  was  ratified  by  the 
shareholders. 

Six  per  cent,  was  paid  on  the  common  stock  in  1906  and  in 
1905 ;  4%  in  the  three  preceding  years.  It  is  obvious  that  as  the 
dividend  on  the  Pennsylvania  stock  was  raised  to  7%  in  1906,  this 
offer  was  highly  advantageous  to  the  shareholders  of  the  Phila- 

(581) 


582  PHILADELPHIA  &  ERIE 

delphia  &  Erie.  The  earnings  of  the  Pennsylvania  are  naturally 
more  stable  than  those  of  the  smaller  road  and  the  percentage 
shown  by  the  Pennsylvania  on  its  common  stock  for  1906  was 
higher  than  that  shown  by  the  Philadelphia  &  Erie,  after  liberal 
maintenance  charges.  On  the  other  hand,  it  was  evident  from  the 
earnings  of  the  road  that  this  offer  on  the  part  of  the  Pennsylvania 
was  amply  justified. 


PHILADELPHIA,  BALTIMORE  AND  WASHING- 
TON  RAILROAD. 

The  Pennsylvania  lines  from  Philadelphia  to  Washington 
are  owned  and  operated  by  a  subsidiary  company  known  as 
above.  The  latter  was  a  consolidation  in  1902  of  the  old  Philadel- 
phia, Wilmington  and  Baltimore,  and  the  Baltimore  and  Poto- 
mac. The  Pennsylvania  owns  practically  all  of  its  capital  stock, 
and  the  road  is  therefore  of  interest  here,  more  especially  for  the 
equity  which  the  Pennsylvania  has  in  its  surplus. 

The  capitalization  of  the  road  Jan.  1,  1907,  stood  as  follows: 

Common    stock $23,493,575 

Funded  debt 20,200,973 

Nominal    capital $43,694,548 

Rentals  cap.  at  4% 21,965,325 

Approximate  gross  capitalization $65,659,873 

Securities  held 8,010,770 

Approx.   net  capitalization $57,649,103 

Approx.  net  capital,  per  mile $81,655 

Average  operated  mileage 706 

Net  earnings  on  net  capital 7.5% 

Stock  on  net  capitalization 41% 

Fixed  charges  on  total  net  income 45% 

Factor  of  safety 55% 

The  gross  earning  for  1906  were  $15,941,241.  Passenger 
earnings  nearly  equalled  freight  earnings. 

The  maintenance  of  way  averaged  $2,681  per  mile  and  main- 
tenance of  equipment  $3,661  per  mile,  or  a  total  of  $6,342  per 
mile,  a  considerable  increase  over  1905.  This  on  a  traffic  density 
of    1,125,965    ton-miles    was    apparently    very    heavy    maintenance, 

(583) 


584    PHILADELPHIA,  BALTIMORE  &  WASHINGTON 

but  the  high  proportion  of  passenger  earnings,  nearly  50%, 
makes  the  comparison  deceptive.  It  was  obviously,  however, 
fully  up  to  the  Pennsylvania's  tradition. 

Net  earnings  showed  7.5%  on  the  estimated  net  capital,  or 
slightly  under  the  figure  of  8.1%  for  the  Pennsylvania  Railroad. 

The  surplus  for  1906  was  $2,782,552,  a  slight  increase  over 
the  previous  year.  This  was  equivalent  to  11.8%  for  the  out- 
standing stock  or  about  the  same  figure  as  shown  by  the  Penn- 
sylvania Railroad. 

Four  per  cent,  was  paid  on  the  common  stock  and  the  bal- 
ance of  the  surplus,  $1,842,810,  turned  back  into  improvements 
of  the  road.  It  is  obvious  from  this  that  6%  might  readily  have 
been  paid,  which  would  have  added  $470,000  to  the  Pennsyl- 
vania's other  income. 

As  of  January  1st,  1907,  stocks  and  bonds  were  carried  on 
the  books  at  a  valuation  of  $8,010,770.  The  principal  items  of 
these  holdings  were 

Baltimore  &  Ohio,  common $1,048,700 

"       pfd 1,000,000 

The  balance  was  chiefly  in  subsidiary  roads. 

Current  liabilities  about  equalled  current  assets  but  there 
was  in  addition  an  item  of  accounts  payable  of  $5,063,826  requir- 
ing funding  or  payment  in  some  form. 


PITTSBURGH^AND  LAKE   ERIE   RAILROAD. 

The  Pittsburgh  &  Lake  Erie  is  the  most  extraordinary  road 
of  any  considerable  dimensions  in  the  United  States,  or  for  that 
matter  in  the  world.  Its  traffic  density  is  the  heaviest,  its  gross 
earnings  the  largest,  per  mile  of  road,  known.  Its  net  capitali- 
zation exceeds  $100,000  per  mile,  and  yet  it  earns  on  this,  34% 
per  annum. 

Its  traffic  density  for  1906  was  nearly  10,000,000  ton  miles 
per  mile  of  road  operated,  against  2,226,046  for  the  New  York 
Central,  and  4,742,081  for  the  Pennsylvania.  Its  gross  earnings 
for  the  year  of  $75,000  per  mile  compared  with  $24,336  for 
the  New  York  Central  and  $37,661  per  mile  for  the  Pennsylvania. 

It  has  more  miles  of  extra  track  than  main  line,  which  is  true 
of  no  other  considerable  road  in  the  country.  It  has  a  locomotive 
for  more  than  every  mile  of  road  operated ;  it  has  only  91  pas- 
senger coaches,  but  over  12,000  coal  and  coke  cars.  And  this  is 
all  that  it  is, — simply  a  coal  and  coke  hauling  road.  But  on  its 
capital  stock  it  practically  earned  a  surplus  in  1906  of  nearly  75%, 
a  figure  which  stands  against  the  extraordinary  figure  of  43.4% 
similarly  estimated  for  the  Delaware  &  Lackawanna.  The  New 
York  Central  earned  only  8%,  and  the  Pennsylvania  only  11.6%. 

The  road  was  opened  in  1879,  the  main  line  extending  from 
Pittsburgh  to  Youngstown,  Ohio,  where  it  connects  with  the  Lake 
Shore.  It  operates  a  total  of  191  miles,  with  210  miles  of  second, 
third  and  fourth  track.  The  road  is  a  part  of  the  New  York  Cen- 
tral system  and  $5,000,100  of  its  $10,000,000  capitalization  is  owned 
by  the  Lake  Shore.  The  directorate  of  1906  comprised  six  of  the 
New  York  Central-Lake  Shore  directors,  with  James  M.  Schoon- 
maker,  vice-president  and  general  manager ;  the  other  directors 
were  John  G.  Robinson,  M.  W.  Watson,  D.  Leet  Wilson,  J.  B. 
Jackson  and  George  E.  Shaw. 

Capitalization. 

The  capitalization  of  the  road  on  January  1st,  1907,  was  as 
follows : 


586  PITTSBURGH  &  LAKE  ERIE 

Common    stock $10,000,000 

Funded   debt 4,000,000 

Total    Capital $14,000,000 

Rents  capitalized  at  4% 12,054,425 

Approx.   gross   capitalization $26,054,425 

Securities    held 5,065,224 

Approx.   net  capitalization $20,989,201 

Approx.  net  capit.  per  mile $109,891 

Average   miles   operated 191 

Net  earnings  on  net  capital 34.3% 

Stock  on   net  capitalization 47% 

Fixed  charges  on  total  net  income 1 1  % 

Factor   of   Safety 89% 

The  nominal  net  earnings  represented  about  15%  on  the  esti- 
mated net  capitalization,  but  in  the  operating  expenses  extraordin- 
ary expenditures  to  the  amount  of  $4,932,000  were  included.  If  this 
sum  be  added  to  the  nominal  net  earnings,  the  actual  earnings  of 
the  road  represented  34.3%  on  the  estimated  net  capitalization. 

The  road  paid  in  1906,  $481,616  of  rentals  on  leased  lines. 
This  amount  capitalized  at  4%,  adds  $12,054,425  to  its  nominal 
capital.    The  stock  represents  47%  of  the  estimated  net  capital. 

Fixed  Charges  consumed  27%  of  the  nominal  net  income,  but 
if  new  construction  and  new  equipment  were  eliminated  from  the 
charges  for  operation,  Fixed  Charges  would  then  have  represented 
only  11%  of  the  total  net  income.  In  any  event  its  Factor  of  Safety 
for  the  underlying  securities  of  the  road  is  very  high,  amounting 
even  on  the  former  estimate  to  73%.  It  is  in  reality  considerably 
higher.  The  company's  holdings  in  other  lines  are  very  slight  and 
it  has  no  equities  worth  mentioning. 

Character  and  Stability  of  Traffic. 

Less  than  10%  of  the  gross  earnings  of  the  road  are  derived 
from  passenger  earnings,  and  more  than  90%  come  directly  from 
freight  traffic.  Of  the  freight  traffic,  bituminous  coal  makes  up 
about  45%,  and  coal  and  coke  together  60%.  Iron  and  manufac- 
tures make  up  15%. 


PITTSBURGH  &  LAKE  ERIE 


587 


While  the  mileage  has  increased  but  slightly,  gross  earnings 
have  increased  enormously,  rising  from  four  and  a  half  million 
dollars  in  1896  to  $14,481,495  in  1906.  The  great  rise  came  be- 
tween 1899  and  1902,  the  traffic  of  the  road  being  doubled  in  four 
years.  The  increase  for  1905  amounted  to  more  than  25%,  and  for 
1906  to  12%. 

The  freight  rates  of  the  road  are  comparatively  high,  averag- 
ing .68c.  per  ton-mile  in  1906.  This  was  a  considerable  increase 
over  1899  when  the  average  earnings  were  only  .57  cents.  The  in- 
crease amounted  to  20%.  The  difference  would  represent  on  the 
1,896,158,559  tons  carried  one  mile  in  1906,  a  difference  of  over  two 
million  dollars  in  the  gross  earnings  of  the  road.  With  the  com- 
munity of  interest  idea,  and  in  the  prosperity  of  the  bituminous  coal 
industry,  the  interests  of  the  road  are  very  closely  bound  up. 

Maintenance. 

Details  of  traffic  density  and  maintenance  over  a  series  of  years 
are  shown  in  the  following  table : 


Year 


1900 
1901 
1902 
1903 
1904 
1905 
1906 


Traffic  Density 


Maintenance  per  Mile 


Way 


5,582,270 
5,857,688 
7,494,003 
7,622,328 
6,811,229 
8,568,288 
9,927,531 


511,044 
14,948 
15,455 
15,296 
13,329 
19,260 
19,236 


Equipment 


Total 


$7,101 
5,835 
8,604 
12,442 
12,539 
16,659 
20,348 


$18,145 
20,783 
24,059 
27,738 
25,868 
35,919 
39,584 


As  with  the  other  Vanderbilt  lines,  a  change  was  made  in  the 
accounting  methods  in  1905  and  separate  items  entered  for  new 
construction  and  new  equipment,  previously  lumped  in  with  ex- 
penses of  operation.  These  items  have  been  included  in  the  table 
above  in  order  to  preserve  its  comparative  value.  Actually,  for 
1906,  maintenance  of  way  amounted  to  $7,144  per  mile  and  the 
maintenance  of  equipment  to  $6,611  per  mile,  or  a  total  of  $13,755 
per  mile.  When  the  $4,933,000,  expended  for  new  construction  and 
new  equipment,  was  added  in,  the  total  was  as  shown  in  the  table 
above. 

Taking  the  figures  as  a  whole,  it  will  be  seen  that  this  road 
in  1905  and  again  in  1906  spent  more  in  maintenance  and  improve- 
ments per  mile  than  most  of  the  American  roads  have  cost  per  mile 
to  build  and  equip,  and  more  than  the  actual  gross  mileage  capitaliza- 


588  PITTSBURGH  &  LAKE  ERIE 

tion  of  such  roads  as  the  Chicago  &  Northwestern,  the  Burlington, 
the  St.  Paul,  the  Canadian  Pacific,  etc.  For  a  series  of  years  these 
enormous  surcharges  have  formed  part  of  the  systematic  policy  of 
the  road. 

The  nominal  surplus  earnings  in  1906  amounted  to  $2,485,021, 
as  against  $2,142,000  in  1905  and  $1,472,000  for  the  year  preceding. 
This  was  24.8%  on  the  capital  stock  as  against  21.4%  in  1905,  and 
14.2%  in  1904. 

But  if  to  the  nominal  surplus  were  added  the  sums  spent  for 
new  equipment,  and  new  construction,  the  actual  surplus  would 
have  been  38%  in  1904,  64.5%  in  1905,  and  74.8%  in  1906.  This 
latter  figure  stands  against  a  similar  estimate  of  23.1%  for  the  Lake 
Shore. 

The  road  paid  6%  dividends  from  1884  to  1891;  8%  in  1892; 
10%  annually  to  1906,  and  11%  in  1906.  Should  the  present  earnings 
continue,  undoubtedly  extra  dividends  will  be  declared.  If  the  Lake 
Shore  pays  10%,  with  actual  earnings  in  the  neighborhood  of  23%, 
and  is  worth  $300  a  share ;  it  is  fair  to  assume  that  the  Pittsburgh 
and  Lake  Erie,  paying  11%  and  on  a  similar  basis  earning  74%, 
should  be  worth  considerably  more.  The  stock  is  not  listed  on  anv 
exchange,  and  practically  none  of  it  is  on  the  market.  Probably 
there  are  very  few  holders  who  would  part  with  their  stock  under 
present  conditions  at  less  than  $400  a  share,  and  while  on  this 
basis  the  present  dividend  would  yield  only  about  2^%,  yet  the 
undistributed  surplus  of  1906,  amounting  even  after  deducting 
extraordinary  improvements  to  13.8%  over  the  11%  paid,  is  so 
large  as  readily  to  justify  such  a  price,  or  perhaps  a  still  higher 
figure.  Dividing  the  actual  surplus  for  1906  half  and  half,  the 
road  might  have  paid  a  30%  or  35%  dividend  as  easily  as  the 
Lackawanna  paid  20%. 


PITTSBURGH,   CINCINNATI,  CHICAGO  AND 
ST.  LOUIS  RAILWAY. 

(The  Panhandle.) 

The  Pittsburgh,  Cincinnati,  Chicago  and  St.  Louis  Railway, 
familiarly  known  as  the  Panhandle,  is  one  of  the  subsidiary  lines 
of  the  Pennsylvania  Company.  It  operates  a  line  more  or  less 
parallelling  the  Pennsylvania's  own  line  from  Pittsburgh  to  Chi- 
cago, reaching  also  to  Cincinnati  and  to  Louisville.  It  forms  a 
sort  of  middle  link  in  the  Pennsylvania  system,  with  the  Vandalia 
for  St.  Louis  and  Illinois  points  and  with  the  Grand  Rapids  and 
Indiana  for  Michigan  points. 

The  road  represents  the  consolidation  in  1890  of  the  Pittsburgh, 
Cincinnati  and  St.  Louis;  the  Chicago,  St.  Louis  and  Pittsburgh; 
the  Cincinnati  and  Richmond,  and  the  Jeffersonville,  Madison  and 
Indianapolis  railroads.  It  controls  by  lease  the  Little  Miami,  194 
miles,  and  its  owns  the  entire  capital  stock,  $2,000,000,  of  the  Cin- 
cinnati and  Muskingum  Valley  Railroad.  It  owns  a  one-third 
interest  in  the  control  of  the  Hocking  Valley,  that  is,  $2,308,200  par 
value  of  the  common  stock. 

Ownership. 

The  Pennsylvania  Company  owns  $22,470,000  par  value  of  the 
preferred  stock  (81%)  of  the  Panhandle,  and  $14,587,000  par  value 
of  the  common  stock,  or  a  large  majority  interest.  The  directors 
and  executive  officers  of  the  Panhandle  are  practically  the  same 
as  those  of  the  Pennsylvania  Company. 

Capitalization. 

The  capital  account  on  January  1st,  1907,  stood  as  follows: 

Common   stock $25,226,769 

Preferred  stock 27,563,922 

Total  $52,790,691 

Funded  Debt 50,921,000 

Coll.  Oblig 2,500,000 

Car  Trusts 10,093,795 

Total  Capital $116,305,486 

(589) 


590  PITTSBURGH,  CINCINNATI,  CHICAGO  &  ST.  LOUIS 
Rentals  capitalized  at  4% 34,050,000 

Approx.   gross   capitalization $150,355,486 

Securities    held 5,571,930 

Approx.   net   capitalization $144,783,556 

Approx.  net  capit.  per  mile $101,311 

Aver,  miles  operated 1,429 

Net  earnings  on  net  capital 6.6% 

Stock    on   net   capitalization 31% 

Fixed  charges  on  total  net  income.  . .  .  54% 

Factor    of    Safety 46% 

The  estimated  net  capitalization  per  mile  of  the  Panhandle, 
$101,311,  compares  with  a  similar  estimate  of  $177,354  for  the 
Pennsylvania  Company,  $78,987  for  the  Lake  Shore,  $69,150  for  the 
Wabash,  and  $58,374  for  the  Big  Four,  all  contiguous  roads.  The 
net  earnings  represent  6.6%  of  the  estimated  net  capitalization,  as 
compared  with  5.8%  for  the  Pennsylvania  Company,  5.3%  for  the 
Big  Four,  and  12.7%  for  the  Lake  Shore.  In  other  words,  its 
capitalization  on  the  basis  of  earnings  is  about  the  same  as  that 
of  the  Pennsylvania  Company  and  the  Big  Four,  but  very  high  as 
compared  with  the  Lake  Shore. 

Aside  from  its  holdings  in  the  Hocking  Valley  Railroad,  the 
Panhandle  has  no  considerable  equities  in  other  roads. 

The  stocks  represent  about  two-fifths  of  the  estimated  net 
capitalization,  as  against  about  one  quarter  for  the  Pennsylvania 
Company.  Fixed  Charges  in  1906  consumed  a  little  more  than 
half  of  the  total  net  income,  leaving  an  ample  Factor  of  Safety  for 
the  underlying  securities,  guaranties,  etc. 


Increase  of  Capitalization. 
The  increase  of  capitalization  over  six  years  was  as  follows: 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt 

Total 

Gross 
Earnings 

1900, 
1906 

$25,210,721 
25,226,769 

$22,700,793 
27,563,922 

$46,515,000 
53,421,000 

$94,426,514 
106,211,691 

$22,264,923 
34,485,500 

Net  increase  over  six  years:  Nominal  Capital,  11%;  Gross  Earnings,  54%. 


PITTSBURGH,  CINCINNATI,  CHICAGO  &  ST.  LOUIS  591 

Character  of  Traffic. 

Products  of  mines  make  up  54%  of  the  total  freight  tonnage, 
and  of  this  two-thirds  was  due  to  bituminous  coal.  Manufactures 
make  up  26%  ;  farm  products  a  little  less  than  9%. 

Stability  of  Earnings. 

In  ten  years  the  gross  earnings  have  doubled,  while  the  mileage 
has  but  very  little  increased.  The  gross  earnings  per  mile  rose  from 
$11,930  in  1896  to  $24,133  in  1906.  That  this  increase  has  been 
steady  and  continuous,  showing  practically  no  setback  from  one 
vear  to  the  other,  the  following;  detail  shows : 


Year 

Miles  Operated 

Gross  Earnings 

Earnings 
per  Mile 

1896 

1,403 
1,403 
1,403 
1,403 
1,407 
1,407 
1,416 
1,418 
1,423 
1,427 
1,429 

$16,738,812 
17,683,947 
18,942,651 
21,196,817 
22,264,924 
24,290,892 
26,634,358 
28,960,821 
28,532,475 
31,417,095 
34,485,500 

$11,930 
12,176 
13,501 
15,108 
15,824 
17,264 
18,809 
18,783 
20,050 
21,863 
24,133 

1897 

1898 

1899 

1900 

1901 

1902 

1903. . 

1904 

1905 

1906 

Under  the  Community  of  Interest  arrangement,  the  average 
earnings  per  freight  ton-mile  increased  from  .55  cents  in  1899  to 
.65  cents  in  1906,  or  one  mill  per  ton.  This,  on  the  3,844,000,000  tons 
carried  one  mile  would  represent  a  difference  of  about  $3,800,000 
on  the  gross  earnings  for  1906.  Average  earnings  per  freight  ton- 
mile  increased  only  from  .13  cents  to  .16  cents,  so  that  comparatively 
little  of  this  increase  in  rate  resulted  in  net  profit  to  the  road.  Still 
it  meant  a  difference  of  over  $1,000,000  in  the  net  freight  earnings 
of  the  road  for  1906. 

Maintenance. 

The  traffic  density  of  the  road  is  rather  heavy,  2,690,091  ton- 
miles  per  mile  of  road  operated  in  1906.  Its  maintenance  charges 
were  very  heavy,  amounting  to  $7,944  per  mile  in  1906. 

The  company  had  in  1906  457  miles  of  additional  main  track, 
or  about  35%.  The  details  of  the  traffic  density  and  maintenance 
follow : 


592  PITTSBURGH,  CINCINNATI,  CHICAGO  &  ST.  LOUIS 


Traffic  Density 

Maintenance  per  Mile 

Total 
per  Mile 

Way 

Equipment 

1901 

1,939,173 
2,019,448 
2,088,097 
1,983,768 
2,440,148 
2,690,091 

$2,197 
2  460 

$3,026 

19  KfU 

$5,223 
4,964 
6,516 
5,930 
6,910 
7,944 

1902 

1903 

2  500                a.  niR 

1904 

2,292 
2,735 
3,222 

3,638 

14,175 

4,722 

1905 

1906 

Average. . . . 

2,193,454 

$2,567 

$3,680 

$6,247 

Erie 

2,366,817 
3,102,376 
3,246,341 

1,845 
4,308 
3,314 

.     2,890 
4,093 
4,139 

4,735 
8,401 
7,453 

Lake  Shore . . . 
Penn.  Co 

Improvements. 

From  the  surplus  earnings  the  following  sums  have  been  set 
aside  for  improvements : 

1900 $690,601 

1901 : 1,419,756 

1902 808,661 

1903 347,351 

1904 690,058 

1905 1,000,000 

1906 900,000 


Total $5,856,427 

Surplus  Earnings. 

In  the  face  of  a  very  heavy  increase  in  maintenance  charges 
(from  $5,223  to  $7,944  per  mile),  the  surplus  earnings  increased 
from  $2,382,351  in  1900  to  $4,517,586  in  1906.  The  preferred 
stock  is  entitled  to  5%  dividends  after  3%>  has  been  paid  on  the 
common,  but  in  the  following  table  the  percentage  earned  on  the 
common  is  the  per  cent,  of  surplus  shown  for  the  common  after 
the  preferred  dividend  is  actually  paid. 


Dividends 

Per  cent 

Dividends 

Average 

Year 

Surplus 

on  Preferred 

Earned  on 

Paid  on 

Price 

Stock 

Common 

Common 

Common 

1900 

$2,382,351 

4 

5.9 

— 

68 

1901 

3,696,992 

4 

11.3 

1% 

64 

1902 

2,249,309 

4 

5.3 

3 

83 

1903  .... 

2,425,741 

4 

5.2 

3 

71 

1904 

2,920  238 

4 

7.3 

3 

65 

1905 

4,080,311 

4 

11.8 

3 

70 

1906 

4,517,586 

5 

12.4 

3i 

81 

PITTSBURGH,  CINCINNATI,  CHICAGO  &  ST.  LOUIS  593 

In  1906  a  change  was  made  in  the  method  of  accounting, 
whereby  the  principal  paid  on  car  trusts  was  separated  from  the 
interest  thereon,  and  charged  in  after  surplus,  instead  of  being 
included  in  fixed  charges  as  heretofore.  In  order  to  make  the  com- 
parison with  1906,  the  amount  so  paid  in  1905  ($506,112)  has  been 
added  in  the  above  table  to  the  nominal  surplus  shown  in  1905,  but 
has  not  been  so  added  in  the  previous  years.  This  accounts  for 
the  sudden  increase  of  surplus  shown  from  1904  to  1905  and  1906. 

Dividend  Record. 

The  dividend  record  for  a  series  of  years  is  as  follows : 

Preferred.  Common. 

Year.  %  % 


1891 

1892-93 

1 
4 

1901 

1902-6 

1906 

1894 

1895 

1896 

1897-8 

2 

nil. 
2 
nil. 

1899 

1900-1905 

3 
4 

1 

3  yearly 
3/2 

1906 

5 

The  Balance  Sheet. 

Excluding  material  on  hand,  according  to  the  custom  adopted 
in  this  book,  the  balance  sheet,  December  31st,  1906,  showed: 

Current   Assets $6,241,567 

Current  Liabilities 10,074,700 


Leaving  a  debit  balance  of $3,833,133 

Included  in  the  current  liabilities  shown  above,  was  $4,250,000 
due  to  the  Pennsylvania  Company  for  advances  on  construction, 
and  this  amount  due  to  the  holding  company  might  legitimately  be 
deducted  from  the  current  liabilities  shown  above.  The  item  of 
cash  amounted  to  $1,619,960  and  the  balance  to  credit  of  profit  and 
loss  was  $3,826,488. 

The  company  paid  into  the   sinking  fund  during  the  year  of 
1906,  $449,990,  and  $596,133  as  principal   on  car  trusts,  both   of 
which  items  were  charged  against  income. 
38 


594  PITTSBURGH,  CINCINNATI,  CHICAGO  &  ST.  LOUIS 

Investment  Value. 

The  preferred  stock  is  entitled  to  4%  dividends  and  after  3% 
has  been  paid  on  the  common,  to  an  additional  1%,  and  after 
5%  has  been  paid  on  the  common  both  classes  share  alike. 

Since  the  advent  of  the  Cassatt  administration  in  1900,  4% 
has  been  paid  continuously  on  the  preferred.  In  1906  the  stock 
was  put  on  a  5%  basis.  It  sold  as  low  as  $90  per  share  in  1903-4. 
rising  to  $112  in  1905  and  $109  in  1906. 

Inasmuch  as  a  handsome  surplus  had  been  earned  on  the 
common,  the  preferred  may  be  regarded  as  a  fairly  solid  5%  stock, 
entitled  to  sell,  with  time  money  at  4%,  at  from  $100  to  $125  per 
share, — or  better,  in  view  of  the  proviso  by  which  the  stock  may 
receive  dividends  additional  to  5%,  when  that  amount  has  been  paid 
on  the  common  also. 

Including  the  amounts  paid  on  car  trusts  as  a  part  of  the 
surplus  income,  the  common  in  1906  showed  12.4%  after  payment 
of  the  full  5%  dividend  on  the  preferred.  3%  annually  has  been 
paid  on  this  stock  from  1902,  and  in  1906  the  stock  was  put  on  a 
4%  basis.  This  dividend  was  amply  earned  and  should  the  hand- 
some increase  of  earnings  which  the  road  has  shown  in  previous 
years  continue,  the  stock  might  readily  be  placed  on  a  5%  basis. 
The  stock  sold  as  high  as  $105  per  share  in  1902,  declining  to  $55 
per  share  in  1903,  rising  again  to  $87  per  share  in  1906  and  declin- 
ing to  $67  in  March  of  1907. 

As  a  fairly  solid  4%  stock,  with  prospects  of  an  increase  to 
5%,  the  , stock  might  reasonably  sell,  with  money  at  4%,  well 
towards  par  and  if  bought,  therefore,  at  anything  like  the  low 
levels  of  1907  or  1903,  it  should  show  in  time  a  satisfactory  profit 
to  its  purchaser. 


READING   COMPANY. 

The  greatest  of  the  great  "Coalers,"  having  larger  holdings  in 
the  anthracite  coal  fields  than  all  of  the  other  prominent  coal  roads 
put  together,  with  a  stormy  past,  and  undoubtedly  a  great  future, 
the  "Reading,"  as  it  is  known,  is  one  of  the  most  notable  of  Ameri- 
can railways,  outside  of  the  great  trunk  lines. 

Although  it  operates  directly  only  a  thousand  miles  of  road,  it 
controls  by  stock  interests  and  otherwise  more  than  a  thousand 
more.  On  its  own  lines  its  gross  earnings  amount  to  nearly  forty 
millions  of  dollars.  It  has  a  majority  interest  in  the  Central  Rail- 
road of  New  Jersey ;  and  the  operations  of  the  company  include  one 
of  the  largest  coal  properties  in  the  world.  Since  the  anthracite 
coal  fields  are  limited,  it  is  probable  that  these  holdings  will  steadily 
increase  in  value,  and  already  their  estimated  valuation  is  sufficient 
to  wipe  out  a  large  part  of  the  indebtedness  of  the  road,  leaving 
the  railroad  properties  and  all  its  stock  holdings  to  the  shareholders 
free  of  charges. 

History. 

The  Reading  was  originally  projected  simply  to  carry  coal 
from  the  anthracite  coal  basins  in  Schuylkill  County,  to  tidewater 
at  Philadelphia.  From  this  slender  beginning,  it  was  able  to  build  up 
so  that  in  1892-3,  it  formed  a  system  owning  or  controlling  over 
8,000  miles  of  track.  This  was  under  the  famous  McLeod  manage- 
ment, which  came  to  so  disastrous  an  end  in  the  general  toppling 
of  financial  edifices  in  1893.  It  had  then  leased  the  Lehigh  Valley, 
obtained  control  of  the  Delaware  and  Lackawanna,  and  the  McLeod 
management  had  also  gained  the  upper  hand  in  the  Boston  and 
Maine,  and  the  New  York  and  \Te\v  England  railroads.  The 
combination  was  one  of  the  most  spectacular  thai  had  been  formed 
up  to  that  time,  and  at  the  close  of  1892,  Mr.  Van  Oss,  writing  in 
his  "American  Railroads,"  said  that  "it  is  certain  that  though  a 
few  years  must  elapse  before  we  shall  be  in  a  position  to  gauge  their 
full  bearing,  we  are  justified  in  expecting  wondrous  results." 

The  "wondrous   results"  were  never  realized,  the  lease  of  the 

(595) 


596  READING 

Lehigh  was  broken,  and  out  of  the  wreck  of  this  monstrous  combi- 
nation, the  present  Reading  Company  was  formed.  It  took  over  the 
old  Philadelphia  and  Reading  Railroad  and  the  Philadelphia  and 
Reading  Coal  and  Iron  Company,  the  reorganization  being  effected 
in  1896.  The  new  company  did  not  speedily  prosper,  but  in  1901 
the  property  came  under  the  directing  genius  of  George  F.  Baer, 
who,  despite  temperamental  peculiarities,  has  brought  the  road  to  a 
high  point  of  efficiency  and  prosperity. 

The  mileage  of  the  company  carries  the  road  from  its  central 
point,  Philadelphia,  through  Reading,  up  to  a  perfect  network  of 
railways  in  the  anthracite  regions,  while  other  branches  lead  to 
Port  Reading,  opposite  Staten  Island,  N.  Y.,  and  southward  from 
Philadelphia  to  Atlantic  City  and  Cape  May.  The  Wilmington  and 
Northern,  and  the  Perkiomen  and  other  small  roads  are  also  in- 
cluded as  a  part  of  the  system.  Naturally  the  road  operates  in  close- 
conjunction  with  its  subsidiary  line,  the  Central  R.  R.  of  New  Jersey. 

Ownership. 

At  the  beginning  of  1903  it  was  announced  that  the  Baltimore 
and  Ohio  and  the  Lake  Shore  had  jointly  purchased  control  of  the 
road.  At  the  last  reports  the  Baltimore  and  Ohio  owned  $6,065,000 
of  the  first  preferred.  $14,265,000  of  the  second  preferred,  and 
$10,002,500  of  the  common  stock:  and  the  Lake  Shore  a  similar 
amount  of  each  issue.  This  gives  a  total  of  over  $60,000,000  of 
the  $140,000,000  of  the  capital  stock  of  the  company,  and  this  with 
the  private  holdings  of  associated  interests,  assures  absolute  con- 
trol. Morgan  interests  have  long  been  identified  with  the  fortunes 
of  the  Reading,  and  exercise  a  potent  voice  in  its  affairs.  The  stock- 
is  closely  held,  despite  the  enormous  tradings  which  have  been 
carried  on  in  the  stock  exchange. 

The  directorate  of  the  road  includes  H.  McK.  Twombly,  repre- 
senting the  Vanderbilt  interest ;  Charles  Steele,  representing  the 
Morgan  interests;  George  F.  Baer.  president  of  the  Reading,  and 
likewise  of  the  Central  of  New  Jersey,  and  a  director  in  the  Le- 
high Valley;  Henry  A.  Dupont,  president  and  general  manager  of 
the  subsidiary  Wilmington  and  Northern;  Joseph  S.  Harris,  capi- 
talist, president  of  the  Jerome  Silver-Copper  Mines;  Edward  T. 
Stotesbury,  also  a  director  in  the  Lehigh  Valley,  the  Cambria  and 
Pennsylvania  Steel  companies,  and  similar  corporations ;  Henry  C. 
Frick,  also  a  director  in  the  Norfolk  and  Western,  the  Union  Pa- 
cific, the  Chicago  &  Xorth  Western  and  other  roads,  and  understood 


READING  597 

to  be  one  of  the  heav)  stockholders  of  the  Reading;  Henry  P.  Mc 
Kean,  and  Samuel  Dickson. 

The  directors  of  the  subsidiary  companies,  the  Philadelphia 
and  Reading  Railway,  and  the  Philadelphia  and  Reading  Coal  and 
Iron  Company,  are  practically  the  same;  and  the  three  companies 
are  managed  as  a  coherent  whole. 

Capitalization. 

Organized  into  three  separate  companies,  with  practically 
identical  officers,  the  accounts  of  the  Reading  and  its  two  subsidi- 
aries present  an  intricate  and  confusing  scheme  of  interlacing  ac- 
counts which  tend  to  make  analysis  difficult  and  somewhat  arbitrary. 

The  "Reading  Company"  owns  the  entire  capital  stock  of  the 
Philidelphia  and  Reading  Railroad,  and  the  Philadelphia  and  Read- 
ing Coal  and  Iron  Company,  as  well  as  large  amounts  of  their 
bonds  and  a  large  item  of  debt  from  the  coal  company.  In  the  fol- 
lowing scheme  the  stocks  and  bonds  of  the  two  subsidiary  com- 
panies held  by  the  Reading  Company  have  been  included  among  the 
items  of  securities  held,  together  with  the  $79,000,000  of  the  coal 
company's  debt.  They  have  not  been  otherwise  included  in  the 
estimate  of  capitalization ;  on  the  other  hand,  all  of  the  stocks  and 
bonds  of  the  two  subsidiary  companies  held  by  the  public  are  com- 
prised in  the  following  statement,  which  is  the  estimated  capital  - 
ization  of  the  Reading  Company. 

Common    stock $70,000,000 

First  Preferred 28,000,000 

Second  Preferred 42,000,000 

Total    stock $140,000,000 

Funded  Debt,  Reading  Co 100,978,372 

equip 4,242,000 

P.  &  R.    (net) 50,339,521 

P.  &  R.  Coal  &  I.  Co.  Loan 1,290,000 

Total   capital $296,849,893  . 

Rentals  capit.  at  4% 76,525,000 

Approx.  gross  capital $373,374,893 

Securities  held  by  all  Cos 211,732,736 

Approx.  net  capital $161,642,157 


U  («  <(  <« 


598  READING 

Approx.  net  cap.  per  mile $161,642 

Average   miles   operated 1,000 

Net  earnings  on  net  capitalization 10.8% 

Stock  on  net  capitalization 86% 

Fixed  Charges  (net)   on  total  net  income  45% 

Factor  of  Safety 55% 

Of  the  total  funded  debt  of  the  Philadelphia  and  Reading  Rail- 
way Company,  twenty  millions  of  dollars  of  Purchase  bonds  are 
held  by  the  Reading  Company,  which  item  is  deducted,  leaving  a 
net  funded  debt  of  the  Railway  as  stated. 

The  rentals  paid  amounted  in  1906  to  $3,061,000,  a  considerable 
part  of  which  returns  to  the  treasury  of  the  Reading  company 
through  its  ownership  of  the  stocks  and  bonds  of  these  leased  lines. 

It  will  be  seen  that  even  deducting  the  huge  amount  of  securi- 
ties owned,  the  estimated  net  capitalization  for  a  thousand  miles  of 
n>ad  is  high.  It  compares  with  an  estimated  net  capitalization  of 
$145,566  for  the  Pennsylvania,  and  of  $132,789  for  the  Lackawanna. 

Yet,  even  with  this  high  estimated  capitalization,  the  net  earn- 
ings of  the  road  show  a  high  percentage.  The  net  earnings  here 
taken  are  simply  the  net  earnings  of  the  Philadelphia  and  Reading 
Railway,  and  are  exclusive  of  the  items  of  Other  Income  alike  of  the 
Railway  Company  and  of  the  parent  Reading  Company.  Even 
on  this  basis,  the  net  earnings  show  10.8%  on  the  estimated  net 
capitalization,  as  against  similar  estimates  of  8.1%  for  the  Pennsyl- 
vania and  13.7%  for  the  Lackawanna. 

It  will  be  seen  further  that  the  securities  held  nearly  equal  the 
outstanding  funded  debt  of  the  combined  companies,  so  that  the 
capital  stock  of  the  Reading  Company  represents  86%  of  this  esti- 
mated net  capitalization. 

Moreover,  the  net  Fixed  Charges,  that  is  to  say,  taxes  and  in- 
terest on  bonds,  etc.,  held  by  the  public,  amount  to  only  45%  of  the 
Total  Net  Income,  leaving  a  wide  Factor  of  Safety  for  the  securi- 
ties of  the  company. 

The  surplus  over  and  above  the  net  fixed  charges  likewise 
leaves  a  considerable  margin  of  safety  for  the  dividends  on  the 
$70,000,000  of  preferred  stock,  limited  to  4%  and  non-cumulative. 

Equities  Owned. 

Of  the  $200,000,000  and  more  of  securities  held,  very  much 
the  larger  part  is  represented  by  stocks  and  bonds  of  the  three 
allied  companies.    The  chief  items  of  the  latter  are  as  follows : 


READING  599 

Reading  Company  general  mortgage  bonds $4,507,001) 

Philadelphia  and  Reading  Purchase  bonds 20,000,000 

Philadelphia  and  Reading  Purchase  stock  (all) 20,000,000 

Philadelphia  and   Reading   Coal  and   Iron   Company's 

stock  (all) 8,000,001) 

Philadelphia   and  Reading   Coal   and   Iron   Company's 

debt  to  Reading  Company  (all) 79,165,226 

Pennsylvania  and  Reading,  account  new  machine  shops  1,200,000 

Total $132,872,226 

Of  the  $70,000,000  of  remaining  securities  the  chief  items  are 
as  follows : 

Central  of  New  Jersey  Company's  stock,  par  value  of  $14,- 
504,000  purchased  for  about  $23,000,000,  and  worth  much  more  now. 

Lehigh  Valley  Railroad  stock,  par  value  $1,000,000,  and  now 
worth  more  than  twice  its  nominal  value. 

The  Perkiomen  R.  R.  stock  (all),  par  value  $1,500,000. 

The  Philadelphia  and  Reading  Terminal  Company's  stock,  par 
value  $8,500,000. 

Wilmington  and  Northern  R.  R.  stock  (practically  all), 
$1,495,600. 

The  total  of  sundry  bonds  is  carried  on  the  books  at  a  valu- 
ation of  $18,884,000;  and  sundry  stocks  (including  the  Central 
R.  R.  of  New  Jersey,  etc.)  are  carried  at  a  valuation  of  $52,355,000. 

The  chief  items  of  income  of  the  Reading  from  its  holdings 
include  the  interest  on  the  Pennsylvania  and  Reading  Purchase 
money  mortgage,  $1,200,000;  dividends  on  stock  (30%),  $6,- 
000,000;  interest  on  coal  company  debt  (2%),  $1,583,304;  other  in- 
terest and  dividend  receipts,  $1,618,000. 

Coal  Holdings. 

Over  and  above  the  net  earnings  of  the  railway  company,  of 
all  the  Reading  Company's  equities,  by  far  the  most  important  are 
those  of  the  Coal  Company.  The  coal  company  is  organized  with  a 
capital  of  $8,000,000  and  its  funded  debt,  outside  its  large  item  of 
debt  to  the  Reading  Company,  is  very  small.  Its  gross  receipts  for 
1906  amounted  to  $34,038,000  and  in  1905  to  $36,099,000.  The  net 
earnings  shown  in  1905  amounted  to  $4,063,000,  but  in  1906,  owing 
to  the  troubles  in  the  anthracite  districts,  this  sum  was  reduced  to 
$3,160,000. 


oOO  KEADIxNG 

Improvements  to  the  amount  of  $1,730,000  were  charged  off  in 

1905,  leaving  an  operating  profit  of  $2,232,000.  This  was  sufficient 
to  pay  the  fixed  charges,  2%  on  the  Reading  Loan,  and  set  aside 
five  cents  per  ton  on  all  coal  mined,  amounting  to  $478,000.  This 
latter  sum  goes  to  the  Depreciation  of  Coal  Land  Funds.  After  all 
these  charges  and  deductions,  there  still  remained  a  small  amount  to 
charge  to  Profit  and  Loss. 

In  1906,  although  the  improvements  item  was  cut  down  to 
$1,131,000,  the  operating  profit  shown  was  only  $2,029,000.  This, 
with  fixed  charges  and  2%  on  the  Reading  Company's  loan,  left 
a  nominal  deficit  of  $130,000,  which  was  charged  off  from  the  profit 
account  of  previous  years. 

The  company's  sales  of  anthracite  showed  an  average  price 
received  of  $3.19  per  ton  in  1906,  and  the  operating  profit,  before 
improvement  charges,  showed  an  average  of  30  cents  per  ton.  In 
1905  this  item  was  slightly  higher.  It  will  be  noted  that  it  is  about 
the  same  figure  as  that  shown  by  the  reports  of  the  Delaware  and 
Hudson  Company's  coal  operations. 

Assuming,  as  has  been  done  in  the  case  of  the  Delaware  and 
Lackawanna  and  the  Lehigh  Valley,  that  this  figure  forms  a  fair 
basis  upon  which  to  estimate  the  value  of  the  company's  coal  holdings, 
we  should  thence  derive  an  enormous  sum.  The  Reading's  anthra- 
cite coal  fields  amount  to  102,000  acres,  and  the  estimate  of  unmined 
coal  on  this  property,  not  including  the  discovery  of  new  veins  in 

1906,  is  put  at  2,450,000,000  tons.  If  this  enormous  amount  were 
computed  to  be  worth  30  cents  a  ton  to  the  operating  company, 
this  would  fix  the  valuation  for  the  Reading's  holdings  at 
$735,000,000. 

This  seems  like  a  perfectly  fantastic  sum,  and  yet  if  it  were  cut 
down  two-thirds,  and  this  unmined  coal  estimated  as  worth  only  10 
cents  per  ton,  this  would  still  yield  a  sum  of  $240,000,000,  or  suf- 
ficient to  pay  off  the  outstanding  bonds  of  the  three  companies  now 
in  the  hands  of  the  public,  and  show  more  than  50%  on  the  total 
capital  stock  of  the  Reading  Company  besides.  Whatever  might 
be  the  realizeable  value  of  this  asset,  it  is  undoubtedly  this  which, 
combined  with  the  favorable  outlook  and  efficient  management, 
lifted  the  stock  to  so  high  a  figure  in  1905-6. 

At  the  present  time  this  asset  is  covered  by  an  entirety  of  stocks 
and  debt  of  only  $89,000,000. 


READING  601 

Nevertheless  it  is  an  extraordinary  fact  that  for  thirty  years, 
from  1870  to  1900,  these  coal  lands  were,  at  least  as  regards  their 
direct  operation,  a  heavy  burden  for  the  owners,  and  that  $79,- 
000,000  of  debt  was  accumulated  within  this  period,  upon  which, 
up  to  1900,  not  a  cent  of  interest  was  ever  paid.  Only  2%  is  paid 
now,  without  apparently  much  justification  for  an  increased  rate  in 
the  immediate  future. 

Yet  another  striking  fact  is  that  in  five  years  to  1906,  the 
amount  of  anthracite  mined  has  increased  very  slightly,  and,  cor- 
respondingly, the  railway's  anthracite  tonnage,  while  the  tonnage  on 
bituminous  coal  has  doubled.  The  Reading's  great  prosperity  does 
not,  paradoxical  as  it  may  seem,  result  from  the  working  of  its 
greatest  asset. 

The  truth  as  to  these  extraordinary  holdings  remains  today 
much  the  same  as  in  1885,  when  it  was  very  wittily  summed  up  by 
the  shareholders'  committee,  appointed  to  investigate  these  coal 
lands,  and  report  upon  their  value : 

"To  do  this  is  as  difficult  as  to  fix  a  value  upon  the  exclusive 
right  to  the  fisheries  off  the  coast  of  Newfoundland.  It  would  de- 
pend entirely  upon  the  amount  required  by  the  market,  and  the  cost 
of  producing  the  supply.  The  value  cannot  be  based  upon  an  esti- 
mate of  the  number  of  fish  uncaught  at  so  much  per  fish.  This  coal 
territory  is  one  of  the  richest  assets  on  the  planet  and  will  be  so 
long  as  anthracite  coal  continues  an  essential  commodity  in  do- 
mestic, manufacturing  and  other  uses,  and  doubtless  can  be  made 
to  earn  a  profit  both  for  the  Railroad  and  the  Coal  and  Iron  Com- 
pany." 

Other  Equities, 

The  other  equities  are  small  as  compared  with  those  of  the 
great  Indeterminate.  Nevertheless  some  of  them  are  of  value.  The 
controlling  interest  in  the  Central  of  New  Jersey  was  purchased 
on  a  basis  of  a  little  over  $155  per  share,  is  comfortably  earning 
its  dividend  of  8%  and  is  reasonably  worth  over  $200  per  share. 
The  latter  company  is,  moreover,  heavily  maintained,  as  reference 
to  its  report  will  show,  and  the  Reading's  interest  in  the  concealed 
earnings  of  the  road  would  readily  amount  to  from  half  a  million 
to  one  million  dollars  or  more  per  year,  for  several  years. 

The  Reading's  holdings  of  one  million  dollars  of  the  stock  of 
the  Lehigh  Valley  will  probably  receive  in  the  course  of  a  year  or 
two  from  50  to  100%  higher  dividends  than  in  1906. 


602  READING 

Yet  another  item  is  the  stock  of  the  Reading  Iron  Company 
which  is  paying  6%  dividends,  and  apparently  earning  a  great  deal 
more.  The  net  outstanding  bonds  of  this  company  amount  to  onh 
$200,000,  while  the  assets  show  at  above  $12,000,000.  This  is  all 
clear  to  the  Reading  Company,  which  owns  all  the  stock.  The  Iron 
Company  owns  61,671  shares  of  the  preferred  and  common  stock 
of  the  Pennsylvania  Steel  Company,  worth  respectively  above  $100 
and  $50  per  share. 

Increase  of  Capitalization. 

Since  its  reorganization  in  1896,  the  capital  stock  has  not 
changed,  and  in  the  six  years  from  1900  the  funded  debt  has  in- 
creased but  slightly.  In  this  same  period  gross  earnings  have  in- 
creased 50%,  which  speaks  very  highly  for  the  prospects  of  the  road. 


Year 

Common        Preferred     Funded  Debt 
Stock             Stock               (net) 

Total 
Capital 

Gross 
Earnings 

1899-0. . 
1  905-6. . 

$70,000,000  $70,000,000  $120,434,288 
70,000,000     70,000,000      156,849,893 

$260,434,288 
296,849,893 

$26,109,733 
39,658,040 

Increase  over  six  years:  Total  capital,  13%;  gross  earnings,  50%. 

Character  of  Traffic. 

Since  the  new  order  of  things  which  came  into  the  Reading's 
management  through  the  assumption  of  control  by  the  Baltimore 
and  Ohio,  that  is  to  say,  the  Pennsylvania  interests,  and  the  Lake 
Shore,  that  is  to  say  the  New  York  Central  interests,  a  marked 
change  has  come  over  the  character  of  the  business  which  the  Read- 
ing has  done.  The  road  still  remains  essentially  a  "Coaler,"  that  is 
to  say,  of  its  gross  earnings  over  40%  is  from  its  coal  traffic,  and 
this  item  was  likewise  considerably  in  excess  of  the  entire  amount 
received  from  other  freight  business.  Since  1899  both  classes  of 
freight  have  increased  over  60%  ;  but  by  far  the  larger  part  of  the 
increase  in  coal  traffic  has  been  the  added  bituminous  coal  tonnage. 
This  latter  stands  now  only  a  little  way  below  the  anthracite  ton- 
nage, and  if  this  rate  of  increase  should  be  maintained,  it  will  soon 
exceed  the  anthracite.  This  latter  gain  is  from  an  interest  not 
owned  or  controlled  by  the  railroad  itself,  and  may  therefore  be 
considered  a  much  healthier  source  of  traffic  than  one  specially 
fostered  by  a  railway. 

All  told,  freight  earnings  yield  over  80%  of  the  railways's  gross 
earnings,  the  passenger  traffic  yielding  less  than  15%. 


READING  603 

The  company  does  not  further  itemize  its  traffic. 

Stability  of   Earnings. 

The  figures  for  the  full  year  of  1896-7  are  not  available,  but 
since  1898  gross  earnings,  and  likewise  gross  per  mile  have  in- 
creased nearly  90%.     The  increase  in  mileage  has  been  very  slight. 

Moreover  this  gain  in  earnings  has  apparently  been  derived 
almost  exclusively  from  gain  in  business,  and  not  from  an  increase 
in  rates.  Apparently  the  rates  which  the  Reading  was  receiving 
in  1906  are  but  little  in  advance  of  those  of  the  bed  rock  year  of 
1899.  In  that  year  the  average  rate  per  ton-mile  on  the  coal  traffic 
was  .68c.  per  ton  per  mile,  and  on  merchandise  traffic,  .95c.  In 
1906  these  rates  were  identically  the  same.  Apparently  the  rates  re- 
ceived on  the  anthracite  tonnage  are  higher,  but  this  has  been  bal- 
anced by  the  growth  of  the  bituminous  coal  traffic,  doubtless  car- 
ried at  a  somewhat  lower  rate.  Be  this  as  it  may,  the  average  re- 
mains the  same. 

Whence  then  has  come  the  great  increase  of  business  shown 
in  the  tables  below?  Undoubtedly  co-operation  between  the  Van- 
derbilt  and  Pennsylvania  interests  has  thrown  to  the  Reading  a 
considerable  quantity  of  business  which  it  did  not  have  when  it  was 
an  active  competitor  of  both  these  systems.  Moreover  all  the  roads 
of  the  country  have  shown  a  vast  development  of  business  within 
the  same  period,  and  what  remains  may  probably  be  set  down  to 
intelligent  and  energetic  management.  The  following  is  the  table 
for  the  nine  vears  under  view : 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1897-8 

914 
915 
1,000 
1,000 
1,003 
1,010 
1,012 
1,015 
1,000 

$21,475,242 
22,456,193 
26,109,733 
27,617,422 
29,170,378 
31,708,524 
34,250,489 
36,832,070 
39,658,040 

$23,503 
24,540 
26,109 
27,6173 

1898-9 

1899-0.. 

1900-1 

1901-2 

29  083] 

1902-3 

31,394) 
33,8441 
36,287 
39,658] 

1903-4 

1904-5. . 

1905-6 

Maintenance. 

Under  the  new  regime  the  Reading  has  been  charged  very 
heavily  for  maintenance  and  more  heavily  in  1906  than  ever  before, 
a?  the  following  table  will  show: 


60-1 


READING 


Year 


1901-2 , 
1902-3 , 
1903-4, 
1904-5. 
1905-6. 


Traffic  Density 


2,825,301 
3,192,286 
3,297,350 
3,686,007 
4,103,534 


Maintenance  per  Mile 


Way 


Equipment 


Total 


$2,970 
2,989 
3,047 
2,696 
3.195 


<5d  tQo2 

4,852 
5,627 
5,567 
6,330 


$6,502 
7,841 
8,674 
8,263 
9,525 


Average.  .  .  . 

3,420,895 

$3,033 

$5,181 

$8,215 

Penn 

Lehigh  Valley . 
Lackawanna . . 

3,862,251 
2,771,846 
3,079,629 

! 

3,468 

2,588 
4,754 

4,983 
3,429 
3,579 

8,632 
6,017 
8,333 

Miles  of  extra  main  track,  540. 

The  average  for  maintenance  of  equipment  in  1906  was  $2,- 
250  per  locomotive,  and  $62  per  freight  car.  The  first  was  liberal ; 
the  second  undoubtedly  represented  some  surcharge,  especially  in 
view  of  the  fact  that  one-half  of  the  freight  cars  thus  included  were 
coal  cars  of  an  average  capacity  of  under  25  long  tons. 

Undoubtedly,  under  the  pinch  of  necessity,  this  charge  could  be 
considerably  reduced  without  affecting  the  service  of  the  road. 

Improvements. 
In  addition  to  the  regular  charges  for  maintenance  the  sum  of 
$3,539,000  was  set  aside  from  the  surplus  earnings  of  1906  for  im- 
provements, that  is  to  say,  a  larger  sum  than   that   devoted  to  the 
entire  charges  for  maintenance  of  way. 

Similar  sums  have  been  appropriated  through  previous  years  as 
follows : 

1901-2 $2,006,400 

1902-3 2,228.700 

1903-4 1 ,273.700 

1904-5 979.600 

1905-6 3.539.300 


Total $10,027,700 

These  are  nothing  like  the  sums  which  have  been  set  aside  b\ 
the  Lackawanna,  but  mileage  considered,  they  compare  favorably 
with  the  Pennsylvania,  and  they  exceed  the  appropriations  of  the 
Lehigh  Valley. 

These  items,  too.  are  exclusive  of  sums  averaging  above  one 
million  dollars  a  year  appropriated  for  "new  work" ;  that  is  to  say, 
improvements  to  the  coal  company. 


READING 


605 


With  such  an  improvement  fund,  the  Reading  should  certainly 
be  in  good  physical  condition  and  as  a  matter  of  fact  its  borrowings 
in  the  five  years  have  been  small.  Practically  all  the  improvements 
which  have  been  carried  out  in  this  period,  and  these  have  been 
extensive,  have  been  paid  for  from  surplus  earnings. 

Surplus  Earnings. 

Before  charging  off  the  extensive  improvements  and  the 
amounts  set  aside  for  sinking  fund,  which  amounted  to  $502,000  in 
1906,  the  surplus  for  six  years  has  shown  as  follows : 


Dividends 

Per  cent. 

Dividends 

Average 

Year 

Surplus 

on  Prefer, 

Earned  on 

Paid  on 

Price  (on 

red  Stock 

Common 

Common 

$100  par) 

1900-1 

$6,058,892 

4 

4.6 

21 

1901-2 

5,249,713 

3 

3.5 

39 

7,293,874 

4         U 

6.5 

62 

1903-4 

10,204,338 

4         4 

10.5 

51 

1904-5 

12,729,635 

4          4 

14.1 

H 

55 

1905-6 

12,513,563 

4          4 

13.8 

4 

107 

Adding  together  the  three  and  a  half  millions  devoted  to  rail- 
way improvements,  the  $1,100,000  for  colliery  improvements,  and 
the  $502,000  for  sinking  fund,  the  total  deductions  from  the  surplus 
shown  above,  for  1906.  amount  to  $5,172,000,  leaving  a  net  surplus 
of  $7,340,000,  which  is  the  amount  shown  in  the  consolidated  ac- 
counts of  the  report,  less  the  sinking  fund  payment.  Deducting 
$2,800,000  4%  dividends  on  the  preferred  stocks,  this  left  about 
$4,500,000  net  surplus  for  the  $70,000,000  of  common  stock.  This 
was  equivalent  to  6.5%. 

Dividend  Record. 

In  the  early  days  the  Philadelphia  and  Reading  was  a  pros- 
perous road,  and  paid  dividends  from  1870  to  1875  inclusive  at  the 
rate  of  10%  per  year.  It  suffered  with  other  roads  in  the  decline 
which  set  in  about  that  time;  in  1876  it  paid  only  2T/2%.  and  nothing 
thereafter  to   1900. 

The  reorganization  in  1886  did  not  bring  it  out  of  the  slough 
into  which  it  had  fallen,  and  under  the  Corbin  regime,  it  went  from 
bad  to  worse.  In  1890  A.  A.  McLeod  was  elected  president  and  this 
seemed  to  be  the  beginning  of  a  new  era,  but  the  ornamental 
dreams  of  that  gentleman  came  to  grief  even  before  the  collapse 
of  1893. 


606  READING 

In  1900  3%  dividends  were  paid  on  the  first  preferred  stock ; 
in  1903  dividends  were  begun  on  the  2nd  preferred,  and  in  1905  on 
the  common.    The  full  record  of  the  reorganized  road  is  as  follows : 


1st 

2nd 

Preferred 

Preferred 

Common 

1900 

3 

1 

_ 

1901 

4 

- 

- 

1902 

3 

— 

- 

1903 

4 

H 

- 

1904 

4 

4 

- 

1905 

4 

4 

3* 

1906 

4 

4 

4 

The  Balance  Sheet. 

The  balance  sheet  of  the  Coal  Company  for  the  fiscal  year  of 

1906  showed  current  assets  to  the  amount  of $7,417,543 

current  liabilities    of 2.326,646 

leaving  a  working  balance  of $5,090,897 

Of  the  assets  the  cash  item  amounted  to  $417,612,  and  of  the 
liabilities,  about  $1,588,000  was  account  with  the  Reading  Company 
and  P.  and  R.  Railway. 

The  amount  to  credit  of  Profit  and  Loss  for  the  Coal  Com- 
pany was  $1,259,920,  a  slight  reduction  from  the  previous  year, 
owing  to  the  nominal  deficit. 

The  balance  sheet  of  the  Phila.  &  Reading  Railway  for  the 
same  year  showed: 

Current  assets $14,493,637 

Current   liabilities 7,061,139 

Leaving  a  balance  of $7,432,498 

Of  the  assets,  $3,044,417  was  due  from  the  Reading  Compam. 
and  $1,022,313  from  the  P.  and  R.  Coal  and  Iron  Co.  The  item  of 
cash  was  $922,544.  The  amount  to  the  credit  of  Profh  and  Loss 
was  $9,772,001. 

The  balance  sheet  of  the  Reading  Company  showed : 

Current  assets $2,721,699 

Current   liabilities 5,282,734 

Leaving  a  debit  balance  of $2.561 .035 


READING  607 

In  addition  to  the  assets  included  above,  there  was  due  from  the 
Railway    company    on    account    of    the    new    Reading    machine 

shops $1,200,000 

Account  bonds  retired 394,844 

Current   account 469,554 

A  total  of $2,064,398 

or  nearly  sufficient  to  balance  the  debit  shown  above.  The  item  of 
cash  in  the  current  assets  was  $1,757,076.  The  amount  to  credit  of 
Profit  and  Loss  was  $8,794,398. 

Investment  Value. 

Few  roads  have  shown  such  extraordinary  rise  in  the  value  of 
their  stocks  as  the  Reading  in  the  six  years  following  1900.  The 
Reading  stock,  like  that  of  the  Pennsylvania  and  the  Lehigh  Val- 
ley, is  in  $50  shares,  but  the  following  quotations  are  made  on  the 
basis  of  a  par  value  of  $100,  that  is  to  say  of  two  shares  each,  con- 
forming to  the  custom  of  the  New  York  Stock  Exchange. 

In  1900  the  first  preferred  sold  at  49.  rising  to  90  in  1902,  and 
declining  to  73  in  the  slump  of  1903.  It  sold  as  high  as  96  to  97 
in  1905  and  1906.  In  other  words,  in  the  six  years  it  about  doubled 
in  value. 

Limited  to  4%  dividends,  this  stock  is  a  solid  investment  with 
a  wide  margin  of  safety  on  the  dividend,  and  is  readily  entitled  to 
sell  upwards  of  90,  that  is  to  say,  upwards  of  $45  per  share,  accord- 
ing to  the  prevailing  rates  for  money. 

The  second  preferred  in  1900  sold  below  24,  that  is  to  say  be- 
low $12  per  share,  rising  to  80  in  1902.  and  falling  to  55  in  1003-4. 
It  so!d  at  101  in  1905  and  1906. 

The  higher  price  shown  by  the  second  preferred  is  due  to  the 
fact  that  the  company  has  a  right  to  convert  this  stock  into  one-half 
first  preferred  and  one-half  common,  and  when  the  common  stock- 
rose  to  quotations  of  160,  it  was  natural  that  this  possibility  should 
create  a  slight  preference  in  favor  of  the  stock. 

Still  more  astonishing  was  the  rise  in  the  price  of  the  common. 
Reading  common  sold  down  to  15,  that  is  to  say  $7.50  per  share,  in 
1900,  and  in  the  succeeding  five  years  it  doubled  its  value  four  times 
and  more.  It  sold  up  to  78  in  1902,  declining  to  38  in  1903.  Tt 
more  than  doubled  this  figure  in  the  succeeding  year,  rising  to  82, 


608  READING 

then  to  143  in  1905  and  to  164  in  January,  1906 ;  that  is  to  say.  in 
1906  it  sold  for  more  than  ten  times  the  price  of  1900. 

Quotations  of  164  for  a  4%  stock  seem  fantastic.  The  yield  to 
the  investor  on  this  basis  is  only  2l/2c/o.  Obviously  such  a  price 
was  in  anticipation  of  an  increased  dividend ;  but  it  should  be  said 
further,  that  this  high  figure  was  undoubtedly  due  to  stock  market 
manipulation.  This  was  relatively  easy,  owing  to  the  small  floating 
supply  of  the  stock.  It  seems  to  be  generally  agreed  that  the  heavy 
holders  did  not  sell  even  at  these  high  figures,  and  the  inference  is 
therefore  that  those  in  the  confidence  of  the  management  anticipate 
an  increase  in  the  dividend  in  the  near  future.  Undoubtedly  too,  the 
high  price  for  Reading  was  in  a  considerable  measure  stimulatd  by 
the  extraordinary  rise  in  the  price  of  Lackawanna. 

In  the  very  "moderate  setback  in  the  Spring  of  1906,  Reading 
sold  down  to  112,  the  result  of  weak  speculative  holders  being- 
obliged  to  throw  over  their  margined  stock  for  what  they  could  gel. 
The  stock  rose  again  to  156  in  the  fall  of  the  year.  It  fell  to  c)l  in 
March,  1907. 

The  question  remains,  What  is  a  fair  price  for  Reading?  A 
glance  at  the  table  of  surplus  shown  makes  clear  that  even  with 
heavy  maintenance  charges,  and  after  charging  off  large  sums  for 
improvements,  there  has  been  sufficient  surplus  to  meet  a  6c'r  divi- 
dend in  both  1905  and  1906.  This  could  have  been  paid  comfort- 
ably. 

But  the  prosperity  of  the  Reading  is  acutely  dependent  upon 
the  anthracite  coal  industry,  and  the  bituminous  as  well.  A  setback 
from  the  highly  prosperous  conditions  of  the  past  few  years,  or  the 
return  of  labor  troubles  would  undoubtedly  affect  its  earnings 
heavily.  While  therefore  the  road  under  present  conditions  seems 
amply  able  to  earn  a  6%  dividend  on  its  common,  and  at  the  same 
time  set  aside  a  large  amount  for  improvements,  it  is  evident  thai 
there  is  no  solid  guarantee  that  such  a  dividend  could  be  main- 
tained under  the  stress  of  adversity. 

On  the  other  hand  it  is  clear  that  for  the  first  time  in  long  years, 
the  Reading  is  under  an  efficient  and  conservative  management,  and 
with  the  working  control  of  the  company  vested  in  rival  and  com- 
petitive lines,  there  seems  little  likelihood  of  a  return  of  rate  wars. 
Beyond  all  this,  after  thirty  years  of  deficits,  the  Coal  Company  is 
earning  its  way,  and  a  small  percentage  on  its  debt  besides. 

Owning  all  the  stock  and  practically  all  of  the  debt  of  the  Coal 
company,    Reading   absorbs  absolutely   all   of   the   surplus   the   coal 


READING  609 

properties  can  show.  It  is  not  clear,  even  from  the  progress  made 
in  the  six  years  under  review,  that  this  surplus  will  rise  very  rapidly, 
but  if  anthracite  conditions  should  continue  favorable,  it  ought  to 
improve  somewhat.  The  outlook  for  Reading  from  this  source 
therefore,  seems  fairly  good. 

The  earnings  of  the  railway  have  increased  splendidly  under 
the  new  regime,  and  barring  a  heavy  setback  in  business  conditions, 
these  should  continue  to  increase,  even  though  it  might  not  be  at 
the  same  rapid  rate. 

Prosperous  conditions  through  1907-8  should  certainly  place 
the  Reading  on  a  five  if  not  a  six  per  cent,  basis,  with  every  pros- 
pect that  in  the  course  of  time,  these  may  be  further  increased. 
There  is  no  road  in  the  United  States  with  anything  like  the  potential 
assets  of  the  Reading,  and  while  its  collossal  coal  holdings  are 
difficult  of  assessment,  they  are  certainly  there.  Though  the  possi- 
bilities of  this  asset  should  not  be  allowed  to  dazzle  the  investor,  it 
is  certainly  to  be  taken  into  consideration  in  estimating  the  value 
cf  the  stock. 

Probably  from  the  foregoing  discussion  the  investor  will  con- 
clude that  while  the  prices  of  1906  were  high,  they  might  readily  be 
regained,  even  if  a  substantial  recession  should  come.  A  highly 
speculative  stock  like  Reading  common,  more  or  less  under  the  con- 
trol of  market  manipulators,  is  apt  to  show  very  violent  fluctuations. 
It  is  not  at  all  impossible  that  under  panicky  conditions,  which  re- 
currently come  to  the  Stock  Exchange,  quotations  might  return  to 
the  low  levels  of  1906-7,  i.e.  to  112-91,  and  even,  under  stress,  below 
this. 

Realizing  all  this  the  shrewd  investor  will  probably  watch  for 
such  opportunities,  believing  that  under  125  Reading  common  pre- 
sents an  attractive  purchase.  On  a  6%  basis,  with  favorable  pros- 
pects, the  stock  would  eventually  sell  at  150,  and  perhaps  higher, 
for  its  increases  in  earnings  are  not,  like  the  Pennsylvania,  the  result 
of  heavy  and  costly  improvements,  the  gain  from  which  is  covered 
largely  by  increased  charges  on  new  securities.  But  it  should  be 
added  that  there  are  few  stocks  on  the  list  more  subject  to  in- 
fluences quite  extraneous  to  the  conditions  and  prospects  of  the 
property  itself.  In  other  words,  it  is  one  of  the  stock  market  play- 
things. 


89 


ROCK   ISLAND   SYSTEM. 

ROCK  ISLAND  COMPANY. 
CHICAGO,  ROCK  ISLAND  AND  PACIFIC  RAILROAD. 
CHICAGO,  ROCK  ISLAND  AND  PACIFIC    RAILWAY. 

The  Rock  Island  System,  so-called,  is  made  up  of  several 
separate  companies,  separately  operated,  but  under  the  same 
ownership  and  practically  the  same  management.  The  system 
is  one  of  the  largest  in  the  United  States,  operating  in  1906  nearly 
fourteen  thousand  miles  of  road.  If  we  add  the  Alton,  which  is 
practically  owned  by  the  Rock  Island,  this  would  bring  the  total 
to  nearly  fifteen  thousand,  reaching  into  seventeen  states  and 
territories.  The  lines  of  the  system  practically  gridiron  the  vast 
Southwest,  extending  from  Chicago  and  New  Orleans,  and  west- 
ward to  Denver  and  El  Paso,  and  covering  one  of  the  richest  sec- 
tions of  the  country. 

The  corporate  organization  of  the  system  is  somewhat  com- 
plex. The  head  of  the  organization  is  a  holding  corporation 
known  as  the  Rock  Island  Company,  with  a  capital  outstanding 
of  $138,000,000,  and  no  debt.  This  company  owns  all  of  the  stock, 
save  the  directors'  shares,  of  the  Chicago,  Rock  Island  and  Pacific 
Railroad  Company.  This  corporation  in  turn  owns  about  93% 
of  the  stock  of  the  Chicago,  Rock  Island  and  Pacific  Railway 
Company,  and  all  the  common  stock,  carrying  control,  of  the  St. 
Louis  and  San  Francisco  Railroad  Company,  commonly  known 
as  the  "Frisco."  The  Frisco,  in  its  turn,  owns  a  largely  control- 
ling interest  in  the  Chicago  and  Eastern  Illinois,  and  this  com- 
pany, again  controls  the  Evansvillc  and  Terre  Haute,  which  in 
turn  leases  the  Evansville  and  Indianapolis  Railroad  Company. 
The  Railway  Company  owns  practical  (though  not  absolute) 
control  of  the  Chicago  and  Alton,  which  up  to  1907  was  operated  in 
the  joint  interest  of  the  Rock  Island  and  the  Union  Pacific  Railroad, 
the  latter  owning  the  larger  part  of  the  balance  of  the  stock. 

(610)  — 


ROCK  ISLAND 

This  intricate  (and  wholly  needless)  scheme  will  perhaps  be 
better  held  in  mind  by  means  of  the  following  diagram : 


ROCK  ISLAND  COMPANY 

Capital,  $138,405,682 

CHICAGO   ROCK   ISLAND  C& 

PACIFIC  RAILROAD  CO. 

All  owned  by  the  above 

C.  R.  I.  CS,  P.  RAILWAY 
COMPANY 

93%  of  stock  owned  by 
preceding  Co. 

ST.  LOUIS  ca,  S.  F.  R.  R. 

Entire  Common  stock  carrying 

control,  owned  by  preceding 

Company 

CHICAGO  CS,  ALTON 

Very  close  to  a  majority  owned 
by  preceding  Co. 

CHICAGO   CS,  EASTERN 

ILLINOIS 

Owned  largely  by  preceding 
Company 

Only  the  part  of  the  system  known  as  the  "Rock  Island 
Lines";  comprising  the  old  Chicago,  Rock  Island  and  Pacific, 
and  its  subsidiaries,  will  be  considered  in  the  analysis  which  fol- 
lows. 'The  Frisco  system,  including  the  Chicago  and  Eastern 
Illinois,  etc.,  will  be  separately  treated  under  the  head  of  the  St. 
Louis  and  San  Francisco  Railroad. 

History. 

The  Rock  Island,  as  it  was  currently  known  even  before  it 
took  that  name,  has  the  distinction  of  being  the  first  road  to 
bridge  the  Mississippi  River,  and  the  second  railway  to  reach  the 
Missouri.  It  was  organized  in  1852  to  build  a  railroad  from  Chi- 
cago to  Rock  Island,  where  a  small  island  in  the  middle  of  the 
Mississippi  offered  a  very  favorable  site  for  a  bridge.  This 
bridge  was  complete  in  185(>.  It  is  amusing  now  to  read  of  the 
efforts  of  the  steamboat  interests  to  prevent  its  erection,  and 
even  four  years  after  its  completion,  that  is  to  say  in  1860,  they 
actually  obtained  a  decree  from  the  United  States  courts  for  the 
removal  of  the  bridge  as  "a  material  obstruction  and  a  nuisance." 
This  decree  was  signed  by  Judge  Love,  a  famous  western  jurist. 


612  ROCK  ISLAND 

The  attorney  of  the  railway  company  was  Abraham  Lincoln,  who 
carried  the  case  to  the  United  States  Supreme  Court,  and  won, 
though  only  by  a  narrow  margin.  In  the  meantime  repeated  ef- 
forts were  made  to  burn  the  bridge,  and  Frank  H.  Spearman,  in 
his  interesting  book  on  "The  Strategy  of  Great  Railroads,"  re- 
lates how  two  employees  of  the  Chamber  of  Commerce  of  St. 
Louis  were  arrested  and  tried  for  conspiracy  to  destroy  the 
bridge  in  this  way. 

The  part  of  the  road  separately  built  in  Iowa  was  sold  under 
foreclosure  in  1868.  and  purchased  by  the  parent  company,  the 
consolidation  taking  on  the  name  of  the  Chicago,  Rock  Island 
and  Pacific  Railway  Company.  The  line  to  Omaha  was  com- 
pleted in  1869,  in  the  same  year  as  the  completion  of  the  Union 
Pacific-Central  Pacific  transcontinental  line,  and  two  years  after 
the  completion  of  the  Chicago  and  North  Western  to  the  same 
point. 

Thereafter  the  road  grew  rapidly,  extending  westward  to 
Colorado  Springs  and  Denver,  and  by  means  of  a  subsidiary  com- 
pany, the  Burlington,  Cedar  Rapids  and  Northern,  reaching  to 
St.  Paul  and  Minneapolis,  and  into  South  Dakota,  while  the  con- 
struction of  lines  southwesterly  from  Kansas  City  carried  the 
road  finally  to  El  Paso  in  Texas,  where  its  through  coaches  are 
taken  over  the  lines  of  the  Southern  Pacific  to  California. 

The  road  had  long  been  under  the  domination  of  the  Cables 
in  Illinois,  but  in  1901  a  controlling  interest  was  acquired  by  a 
syndicate  headed  by  W.  B.  Leeds,  formerly  president  of  the 
American  Tin  Plate  Company;  Daniel  G.  Reid,  his  partner  in  the 
tin  plate  industry  ;  William  H.  and  J.  ITobart  Moore.  Mr.  Leeds 
was  elected  president  on  January  1st,  1902,  and  in  the  same  year 
the  complex  series  of  companies  described  above  were  organized. 
The  railroad  company,  organized  in  Iowa,  offered  the  share- 
holders of  the  railway  company  to  exchange  their  stock  on  the  fol- 
lowing basis:  for  each  one  hundred  dollar  share  of  the  railwav  com- 
pany's  stock,  $100  in  4%  collateral  trust  bonds,  and  $70  preferred 
<-k.  and  $100  of  common  stock  of  the  Rock  Island  Co. ;  that 
is  to  say.  the  railway  shareholders,  for  each  $100  share,  received 
$270  of  the  new  securities.  The  Chi..  R.  T.  &  Pac.  Railway 
company  was  then  paying  and  for  some  time  previously  had  been 
paving  5%  on  its  capital  stock.  Through  the  twelve  months  pre- 
ceding the  organization  of  the  new  railroad  company,  the  price 
of  the  railwav  stock  had  averaged  $155  per  share,  and  this  in  turn 


ROCK  ISLAND  613 

was  a  heavy  rise  from  the  average  of  the  fiscal  year  of  1901. 
The  new  securities  were  placed  on  the  market  in  December,  1902, 
and  through  this  and  the  following  months  sold  at  high  prices. 
Had  a  shareholder  made  the  exchange  at  that  time  and  then  un- 
loaded his  securities,  he  could  have  secured  a  maximum  price  of 
$89  for  his  bonds ;  $86  per  share  for  his  preferred  stock  (equiva- 
lent to  $60  for  the  amount  received)  and  $53  for  his  common 
stock,  a  total  of  $202  for  securities  that  a  year  previously  brought 
little  more  than  half  this.  As  a  matter  of  fact,  the  railway  stock 
about  this  period,  sold  as  high  as  $206  per  share. 

In  the  general  slump  of  1903  and  1904,  that  followed,  the 
bonds  sold  down  to  $66,  the  preferred  stock  to  $56,  and  the  com- 
mon stock  to  $19,  or  a  drop  in  the  price  of  the  securities  received 
of  $124. 

Up  to  June  30th,  1906,  all  but  7c/o  of  the  old  railway  stock 
had  been  exchanged,  and  in  addition  the  railroad  company  had 
acquired  $28,904,300  par  value,  the  entire  outstanding  common 
stock  of  the  St.  Louis  and  San  Francisco,  paying  for  the  same 
$17,342,580  5%  collateral  trust  gold  bonds  of  the  railroad  com- 
pany, and  about  $19,500,000  common  stock  of  the  Rock  Island 
Company. 

In  the  year  preceding  this  exchange,  Frisco  Common  ranged 
betwen  $90  and  $63  per  share,  or  an  average  price  of  $76,  the 
price  of  $63  per  share  being  reached  in  April,  1903,  three  months 
before  the  exchange;  so  that  the  purchasers  paid  for  securities 
whose  average  market  value  through  the  preceding  year  was 
around  $22,000,000,  securities  to  a  face  value  of  $36,842,580,  of 
which  $17,342,586  were  5%  gold  bonds.  The  annual  interest 
charges  on  these  bonds  to  the  Rock  Island  Railroad  are  $867,041. 
No  dividends  had  ever  been  paid  on  the  Frisco  stock  up  to  the 
time  of  the  purchase,  and  none  have  ever  been  paid  since. 

In  1904  the  railway  company  acquired  nearly  absolute  con- 
trol of  the  Chicago  and  Alton,  holding  in  1906,  $14,320,000  par 
value  of  the  common,  and  $4,870,000  preferred  stock,  a  total  of 
$19,190,000  out  of  $39,986,100  outstanding  stock,  an  increase  of 
$400,000  par  value  of  the  preferred  from  the  preceding  year. 

At  the  close  of  the  fiscal  year  of  1906  the  Rock  Island  Lines 
were  operating  7,426  miles,  at  the  same  time  the  St.  Louis  and 
San  Francisco  was  operating  5,058  miles;  the  Eastern  Illinois 
94f  miles,  the  Evansville  and  Terre  Haute  310  miles,  bringing 
the  total  mileage  operated  up  to  13,743.    With  the  Colorado  and 


614  ROCK  ISLAND 

Southern,  the  Rock  Island  is  constructing  the  Trinity  and  Brazos 
Valley  line  from  Houston  to  Galveston.  The  St.  Louis  and  San 
Francisco  is  also  financing  the  construction  of  the  Colorado 
Southern,  New  Orleans  and  Pacific,  extending  from  Houston, 
Texas,  to  Baton  Rouge,  from  which  by  trackage  rights  it  will 
reach  New  Orleans.  This  new  construction  will  give  both 
roads  access  to  the  principal  ports  of  the  Gulf.  The  St.  Louis, 
Brownsville  and  Mexico  is  also  under  construction  from  Houston 
to  Brownsville  on  the  Rio  Grande  River,  the  Mexican  border,  by 
B.  F.  Yoakum,  the  directing  head  of  the  Rock  Island  system. 

The  Rock  Island-Frisco  system  is  becoming  an  active  com- 
petitor of  the  Southern  Pacific,  so  that  with  the  completion  of 
the  Western  Pacific,  it  may  be  supposed  that  its  traffic  will  natu- 
rally be  drawn  to  the  new  Gould  line.  The  Rock  Island  lines  meet 
the  Denver  and  Rio  Grande  in  Colorado,  and  the  completion  of 
the  Western  Pacific  would  afford  the  Rock  Island  a  new  outlet 
to  the  Pacific.  In  any  event  it  is  evident  that  the  new  roads  now 
under  construction  will  work  a  considerable  transformation  in 
traffic  arrangements  throughout  the  great  Southwest. 

Ownership. 

Taking  the  constituent  companies  in  order,  the  directorate 
of  the  Rock  Island  Company  includes  William  H.  Moore,  also  a 
director  in  the  First  National  Bank,  New  York,  and  in  the 
United  States  Steel  Corporation;  J.  H.  Moore,  his  brother;  D. 
G.  Reid,  also  a  director  in  United  States  Steel ;  B.  F.  Yoakum, 
former  president  and  now  chairman  of  the  board  of  the  St. 
Louis  and  San  Francisco ;  F.  L.  Hine,  vice-president  of  the  First 
National  Bank,  New  York,  also  a  director  in  the  Liberty  Na- 
tional ;  John  J.  Mitchell,  president  of  the  Illinois  Trust  Company ; 
James  Speyer  of  Speyer  and  Company,  bankers,  also  a  director 
in  the  Baltimore  and  Ohio:  R.  R.  Cable,  formerly  chairman  of 
the  board;  Robert  Mather,  president;  George  T.  Boggs.  secre- 
tary and  treasurer:  Ogden  Mills,  D.  C.  Boissevain.  New  York; 
George  C.  McMurtry.  president  of  the  American  Sheet  Steel 
Company  and  James  Campbell,  St.  Louis. 

The  chairman  of  the  board  is  Benjamin  F.  Yoakum,  and  the 
Finance  committee  (the  equivalent  of  the  Executive  committee) 
consists  of  W.  H.  Moore,  chairman,  Robert  Mather,  James  H. 
Moore,  B.  F.  Yoakum,  D.  G.  Reid,  F.  L.  Hine  and  James  Speyer. 


ROCK  ISLAND  615 

The  directors  of  the  subsidiary  Chicago,  Rock  Island  and 
Pacific  Railroad  Company  are  Messrs.  William  H.  and  James  H. 
Moore;  B.  F.  Yoakum,  D.  G.  Reid,  and  Robert  Mather,  president. 

The  directorate  of  the  Railzvay  company  includes :  Messrs. 
William  H.  and  James  H.  Moore,  Yoakum,  Reid,  Mather,  Mitch- 
ell, Cable,  Hine,  Mills,  McMurtry,  and  in  addition,  Alexander  E. 
Orr,  former  president  of  the  New  York  Life  Insurance  Company. 

The  executive  committee  consists  of  B.  F.  Yoakum,  chair- 
man, William  H.  Moore,  James  H.  Moore,  Robert  Mather,  D.  G. 
Reid,  F.  L.  Hine  and  James  Campbell.  The  executive  committee 
of  the  St.  Louis  and  St.  Francisco  is  the  same. 

The  Rock  Island  representatives  on  the  Alton  board  are : 
William  H.  Moore,  James  H.  Moore,  D.  G.  Reid,  Robert  Mather, 
B.  F.  Yoakum,  and  John  J.  Mitchell.  Mr.  Yoakum,  in  1906,  was 
made  chairman  of  the  board.  By  virtue  of  the  fact  that  he  is 
chairman  of  the  boards  of  all  the  separate  organizations  of  the 
Rock  Island  system,  and  also  of  the  Alton,  Mr.  Yoakum  may  be 
regarded  as  the  present  operating  head  of  the  system,  as  Judge 
Wm.  H.  Moore  is  its  financial  head. 

Capitalization. 

The  principal  items  in  the  complicated  organization  of  the 
Rock  Island  system,  June  30,  1906,  were  as  follows : 

Rock  Island  Company. 

Common    stock $89,448,802 

Preferred   stock 48,956,880 

Total  stock $138,405,682 

Surplus,    1906 $37,271 

Chicago,  Rock  Island  and  Pacific  Railroad  Company. 

Capital    stock $145,000,000 

Funded  debt 87,280,980 

$232,280,980 
Surplus  $257,286 

Cash  in  treasury $874,111 


616  ROCK  ISLAND 

The  entire  capital  stock  except  $500  of  directors'  shares,  is 
owned  by  the  Rock  Island  Company. 

Chicago,  Rock  Island  and  Pacific  Railway  Company. 

Capital    stock $75,000,000 

Funded  debt 164,587,000 

Equipment    Trusts 1,250,000 

Notes    13,500,000 

$254,337,000 

All  but  $4,889,582  or  about  7%  of  the  stock  is  owned  by  the 
railroad  company. 

Capitalization  of  the  System. 

The  following  table  of  capitalization,  consolidates  the  capital 
of  the  Rock  Island  system  and  includes:  (1)  the  outstanding 
stock  of  the  Rock  Island  Company  and  of  the  Chicago,  Rock 
Island  and  Pacific  Railway  Company;  and  the  funded  debt  and 
other  obligations  both  of  the  railroad  and  railway  companies. 
This  gives  the  capitalization  of  that  part  of  the  combined  Rock 
Island-Frisco  system  known  as  the  Rock  Island  Lines,  operating 
in  1906  an  average  of  7,218  miles. 

Capitalization. 

Common  stock $89,448,802 

Preferred    stock 48,956,880 

Total  stock $138,405,682 

Funded  debt— The  Railway  Co 164,587,000 

Equip.    Trusts •.  .  .  .  1,250,000 

Notes    13,500,000 

Funded  debt— The  Railroad  Co 87,280,980 

C.  R.  I.  &  P.  Ry  stock 4,889,582 

Total    capital $4091,913,244 

Rentals  capit.  at  4% 24,961,375 

i  ■  ■■-—  « 

Approx.   gross   capitalization $434,874,619 

Securities  held  (Inc.  $28,904,300  St.  L. 

&  S.  F.  stock  at  par) 47,601,810 

Approx.  net  capitalization $387,272,809 


ROCK  ISLAND 


617 


Approx.  net  capital  per  mile $52,268 

Average  miles  operated 7,218 

Net  earnings  on  net  capital 4.2% 

Stock  on  net  capitalization 36% 


Fixed  Charges  on  total  net  income. 


83% 


Factor  of  Safety. 17% 

In  the  above  table  the  entire  rentals  paid  have  been  capital- 
ized and  not  the  net  rentals.  The  reports  do  not  itemize  the 
"Other  Income"  of  the  system,  so  that  the  rentals  received  by 
the  Rock  Island  have  not  been  deducted  in  the  make-up  of  the 
above  estimate. 

As  a  counter-weight  to  this,  the  $28,904,300  of  the  St.  Louis 
Southwestern  common  stock  in  the  treasury  of  the  railroad  com- 
pany has  been  entered  in  the  above  at  par,  although  it  is  receiv- 
ing no  dividends  and  never  has  received  any. 

Aside  from  the  St.  Louis  and  San  Francisco  common  stock 
there  are  held  by  the  railway  company,  securities  to  a  par  value 
of  $38,757,094.  The  total  of  Other  Income  received  by  the  sys- 
tem was  approximately  $1,057,000,  which,  if  derived  exclusively 
from  income  from  investments  would  give  an  approximate  value 
to  the  securities  held  of  $25,000,000,  so  that  the  valuation  of 
$47,000,000  given  in  the  table  above,  leaves  a  leeway  of  $20,- 
000,000  for  the  value  of  St.  L.  &  S.  F.  stock. 

On  this  estimate  of  the  approximate  net  capitalization  the 
average  capitalization  per  mile  comes  out  at  $52,268.  The  Rock 
Island  formerly  was  usually  classed  in  a  group  of  four  roads:  the 
Burlington,  the  North  Western,  and  the  St.  Paul.  Latterly  it  has 
pushed  more  distinctly  into  the  territory  of  the  Missouri  Pacific. 
To  estimate  its  capitalization  then,  we  may  compare  it  with  these 
four  other  roads  in  the  following  fashion  (figures  for  1906)  : 


Road 

Gross   Earnings 

Estimated    Net 

Per  cent  of  Net 

per  Mile 

Cap.  per  Mile 

Earnings  on  Capital 

North  Western . 

$8,545 

$30,252 

10.5 

St.  Paul 

7,961 

33,900 

9.7 

Burlington 

8,335 

29,128 

8.7 

Missouri  Pacific 

7,101 

30,745 

7.7 

Rock   Island.  . . 

7,098 

52,268 

4.2 

The  percentage  of  net  earnings  shown  by  the  Burlington  on 
its  estimated  net  capitalization  is  actually  somewhat  higher  than 
the  figure  given  above,  owing  to  the  fact  that  it  charges  its  im- 


618  ROCK  ISLAND 

provements  directly  to  operating  expenses  instead  of  making  a 
separate  account,  as  do  the  other  roads. 

Beyond  this  it  will  be  seen  that  the  larger  part  of  the  Rock 
Island  high  capitalization  is  in  the  form  of  fixed  debt,  and  that 
the  capital  stock  outstanding  represents  only  a  little  more  than 
one-third  of  the  estimated  net  capitalization. 

All  this  goes  to  explain  why  it  is  that  a  prosperous  road  like 
the  Rock  Island,  in  a  marvellously  rich  country,  and  with  gross 
earnings  per  mile  well  up  around  those  of  its  chief  competitors, 
and  even  in  the  highly  prosperous  year  of  1906.  had  to  pay  83% 
of  its  total  net  income  for  fixed  charges.  This  percentage  com- 
pares with  45%  on  the  Burlington:  32%  on  the  St.  Paul,  and  39% 
on  the  North  Western. 

In  1902,  the  last  year  before  the  Chicago,  Rock  Island  and 
Pacific  Railway  Company  was  turned  into  the  Rock  Island  sys- 
tem, the  road  showed  gross  earnings  of  $7,278  per  mile;  its  total 
capitalization  in  stocks  and  bonds  per  mile  of  operated  road  was 
$37,456.  of  which  more  than  one-half  was  stock.  The  showing 
of  net  earnings  on  capitalization  was  7.8%,  and  the  fixed  charges 
consumed  40%  of  the  total  net  income,  or  about  the  same  as  the 
Burlington,  the  North  Western  and  the  St.  Paul  in  1906.  These 
are  rather  startling  changes. 

Of  the  $266,000,000  of  the  outstanding  bonds  and  debts  of 
the  system,  very  nearly  $70,000000  is  represented  by  the  bonds 
issued  by  the  Railroad  company  in  exchange  for  Railway  com- 
pany stock,  and  $17,000,000  issued  in  exchange  for  St.  Louis 
and  San  Francisco  common  stock.  These  two  issues  make  up 
about  one-third  of  the  total.  In  some  sense  the  $70,000,000  of 
collateral  trust  bonds  mean  but  little  more  than  a  4%  preferred 
stock,  with  a  difference  however  to  the  Rock  Island  Company, 
that  if  the  earnings  of  the  Railway  were  insufficient  to  meet 
these  interest  charges,  the  Rock  Island  Company's  principal  as- 
set would  revert  to  the  holders  of  the  Railroad  company's  bonds. 

Equities    Owned. 

The  principal  equity  of  the  Rock  Island  Company  is  its  hold- 
ing of  nearly  $29,000,000  of  the  St.  Louis  and  San  Francisco  com- 
mon stock.  Reference  to  the  report  will  show  that  the  Frisco 
portion  of  the  combined  system  is  broadly  similar  in  its  financial 
condition  to  that  of  the  Rock  Island  portion;  that  is  to  say,  in 
1906  its  gross   earnings   were   $6,322  per   mile,   and   its   approxi- 


ROCK  ISLAND  619 

mate  net  capitalization  per  mile  was  $46,710.  On  this  esti- 
mate of  its  net  capitalization,  net  earnings  showed  4.8%,  as 
against  4.2%  for  the  Rock  Island;  the  stock  represented  only 
21%  of  the  estimated  capitalization;  fixed  charges,  in  the  highly 
prosperous  year  of  1906,  consumed  82%  of  the  total  net  income. 
as  against  S3  ft  for  the  Rock  Island.  In  1906  the  road  showed  a 
nominal  surplus  of  $2,309,135,  which  was  equivalent  to  4%  on 
both  the  first  and  second  preferred,  and  5%  on  the  Rock  Island's 
holding  of  the  common ;  but  it  is  to  be  noted  that  in  that  year  the 
Frisco's  average  maintenance  charges  per  mile  were  $1,548 
against  $1,933  on  the  Rock  Island;  $1,902  for  the  Missouri,  Kan- 
sas and  Texas;  $1,948  on  the  St.  Louis  Southwestern,  all 
three  roads  of  about  the  same  traffic  density  as  the  Frisco.  In 
other  words,  the  Frisco's  total  charges  in  1906  were  about  $400 
per  mile  less  than  the  average  of  these  other  three  roads.  This, 
on  5,058  miles  of  operated  road,  would  represent  a  difference  of 
over  $2,000,000,  or  the  larger  part  of  the  surplus  shown  for  the 
year,  and  very  considerably  more  than  the  Rock  Island's  entire 
equity. 

On  the  Rock  Island's  holding  of  Alton  stock  it  received  in 
1906  the  full  4%  to  which  the  preferred  is  entitled.  The  surplus 
remaining  after  maintenance  charges  about  the  same  for  a 
three  years'  average,  represented  about  one  per  cent,  on  the  com- 
mon stock,  as  against  4%  in  the  preceding  year,  and  2.7%  in  1904. 

Up  to  and  during  the  fiscal  year  of  1906  the  Alton  was  di- 
rectly under  the  management  of  Mr.  E.  H.  Harnman,  President 
of  the  Union  Pacific  and  chairman  of  the  executive  committee. 
At  the  close  of  the  fiscal  year,  under  an  arrangement  that  the 
Union  Pacific  and  the  Rock  Island  shall  manage  the  road  in  alter- 
nating years,  Mr.  Yoakum  succeeded  Mr.  Harriman.  Mr.  Harri- 
man,  or  the  Union  Pacific,  owning  only  preferred  stock,  had  no 
interest  whatever  in  showing  earnings  for  the  common  stock, 
of  which  Rock  Island  owns  $14,320,000.  The  Alton  scale  of 
maintenance  charges  has  been  very  liberal,  but  it  would  require 
a  reduction  of  $200  per  mile  in  these  charges  for  each  one  per 
cent,  surplus  shown  as  earned  on  the  common,  supposing  earn- 
ings to  remain  the  same.  The  value  of  the  Rock  Island's  equity 
in  this  stock,  therefore,  over  and  above  the  actual  receipts  was  in 
1906  small. 

In  1905  the  Rock  Island  purchased  $2,500,000  5%  bonds  and 
$2,400,000  of  the  capital  stock  of  the  Consolidated  Indiana  Coal 


620 


ROCK  ISLAND 


Company;  and  in  1906  had  secured  $1,700,000  par  value  capital 
stock  of  the  Deering  Coal  Company  of  Illinois,  at  a  cost  of 
$540,000  stock  and  $200,000  5%  bonds  at  par,  with  an  option  on 
$800,000  further  stock  of  that  company.  The  report  does  not  item- 
ize the  returns  from  these  smaller  investments. 

Increase  of  Capitalization. 

The  capitalization  and  earnings  of  the  Chicago,  Rock  Island 
and  Pacific  Railway  at  the  close  of  the  fiscal  year  of  March  31st, 
1901,  and  the  capitalization  and  earnings  of  the  Rock  Island  sys- 
tem at  the  close  of  the  fiscal  year  of  1906  compare  as  follows: 


Year 

Common        Preferred         Funded             Total 
Stock              Stock               Debt              Capital 

Gross 
Earnings 

1901 

$50,000,000 

$68,081,000  $118,081,000 
270,507,562     409,913,244 

$25,364,695 

1906 

89,448,802 

48,956,880 

51,237,858 

About  $17,000,000  of  bonds  and  as  much  more  of  stocks  were 
exchanged  in  the  purchase  of  the  common  stock  of  the  St.  Louis 
and  San  Francisco,  and  the  acquisition  of  the  Alton  and  other 
securities  by  the  Railway  company  consumed  a  little  over 
$18,000,000  more,  or  a  total  of  approximately  $55,000,000.  De- 
ducting this  $55,000,000  from  the  $408,000,000  of  gross  capitaliza- 
tion of  1906,  the  net  increase  of  capitalization  in  five  and  a  quar- 
ter years  was  therefore  about  $235,000,000,  or  approximately 
200%,  as  against  an  increase  of  gross  earnings  in  the  same  period 
of  100%.  This  roughly  explains  why  it  was  that  Rock  Island  com- 
mon in  1907  was  selling  around  $18  per  share  as  against  a  top 
figure  of  $206  per  share  for  C.  R.  I.  &  P.  Railway  in  1902. 


Character  of  Traffic. 

Passenger  earnings  on  the  Rock  Island  are  high,  contribut- 
ing about  25%  of  the  gross  earnings.  Of  the  freight  tonnage  in 
1906.  26%  was  agricultural  products  and  8%  animal  products,  or 
a  total  of  34%  from  the  farms ;  bituminous  coal  amounted  to 
19%  ;  lumber  to  9%,  the  balance  being  widely  distributed. 

Covering  as  with  a  gridiron  the  lower  and  western  part  of 
the  Mississippi  Valley,  the  prosperity  of  the  Rock  Island  is  in  the 
end  essentially  dependent  upon  the  prosperity  of  the  farms.  It  is 
most  vitally  dependent  upon  the  corn  crop,  that  crop  from  Iowa 
southward  generally  predominating  over  the  wheat  crop. 


ROCK  ISLAND 


621 


Stability  of  Earnings. 

In  1896  the  Rock  Island  was  operating  3,500  miles  of  road; 
in  1906  this  mileage  had  been  doubled,  while  the  earnings  per 
mile  rose  from  an  average  of  $4,861  in  1896  to  $7,000  in  1906,  an 
increase  of  very  nearly  50%.  This  means  that  in  the  face  of  an 
enormous  expansion  of  mileage,  the  larger  part  of  which  has 
been  through  much  more  thinly  settled  country  than  the  older 
part  of  the  line,  the  Rock  Island  has  still  been  able  to  increase  its 
average  earnings  per  mile  by  more  than  half.  No  road  in  the 
west,  all  things  considered,  has  in  this  regard  made  a  better 
showing.  The  items  through  the  period  under  view  have  been 
as  follows : 


Year 


Miles  Operated 


Gross  Earnings 


1895-6 
1896-7 
1897-8 
1898-9 
1899-0 
1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


Per  Mile 


$17,359,653 
16,728,685 
20,382,520 
20,647,246 
23,211,990 
26,075,574 
28,683,824 
44,376,619 
44,969,491 
44,051,509 
51,237,858 


$4,861 
4,684 
5,712 
5,704 
6,384 
6,912 
7,287 
6,359 
6,241 
6,091 
7,098 


Maintenance. 

The  Rock  Island's  traffic  density  is  considerably  lower  than 
that  of  any  of  its  immediate  competitors.  These  items  and  the 
maintenance  charges  for  the  various  roads  in  1906  compared  as 
follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

468,471 
471,571 
428,116 
451,181 
438,531 
514,767 

$1,203 

1,192 

977 

950 

804 

1,011 

$780 
745 
598 
711 
797 
922 

$1,983 
1,937 
1,575 
1,661 
1,601 
1,933 

Average.  . . . 

462,106 

$1,022                  $759               $1,781 

Burlington. .  .  . 
Northwest.  .  .  . 

St.  Paul 

Mo.  Pac.  (2yrs) 
Atchison 

580,024 
640,983 
601,003 
623,807 
577.005 

1,104 

991 

929 

819 

1.123 

1,032                  2,1.36 
858                 1.849 
632                  1 .561 
821                   1  640 

1.113                  223(i 

622  ROCK  ISLAND 

For   the   year    of    1906,    the    following   comparisons    are    of 

interest: 

Gross  Traffic  Maintenance 

Road  Earnings       Density Total 

per  Mile  Way  Eq'p't. 

Burlington $8,335  713,568  $1,271  $1,533  $2,804 

Northwestern...  8,545  694,630  924  1,215  2,139 

St.  Paul I  7,961  670,373  857  804  1,661 

Atchison 9,253  693,873  1,479  1,271  2,750 

Rock  Island 7,098  514,767  1,011  922  1,933 

I I I j 

From  the  above  table  it  will  be  seen  that,  traffic  density  com- 
pared, the  Rock  Island's  maintenance  charges  were  higher  in  1906 
than  those  of  any  other  road,  save  the  Atchison  and  the  Burling- 
ton. With  a  traffic  density  one-quarter  less  than  that  of  the  St. 
Paul,  and  mileage  earnings  nearly  $900  per  mile  less,  the  Rock 
Island's  total  maintenance  was  $270  per  mile  more.  It  seems  dif- 
ficult to  believe  that  with  one-quarter  less  the  average  tonnage  to 
handle,  way  and  equipment  maintenance  should  require  more  on 
the  Rock  Island  than  on  the  St.  Paul,  and  this  difference  of  $270 
per  mile  would  have  meant  a  difference  in  the  surplus  shown  by 
the  Rock  Island  for  the  year  of  $1,950,000.  If  this  be  added  to 
the  $2,100,000  of  surplus  appropriated  for  special  improvement 
and  equipment  fund,  this  would  represent  a  total  of  $4,000,000 
spent  from  earnings  on  the  improvement  of  the  road  during  the 
year.  This  compares  with  $6,000,000  appropriated  by  the  North- 
western, and  84,765,000  for  the  St.  Paul.  It  will  be  seen  therefore 
that  the  total  maintenance  and  improvement  charges  of  the  Rock- 
Island  for  1906  compare  very  favorably  with  those  of  its  most 
prosperous  rivals. 

It  is  to  be  noted  further  that  while  gross  earnings  in  1906 
increased  about  16%,  maintenance  charges  increased  about  20%. 
so  that  the  road  in  that  year  was  relatively  better  maintained  than 
in  1905.'  In  other  words,  for  the  year  the  road  was  able  to  add 
$2,382,000  to  its  maintenance  charges  and  set  aside  in  addition, 
$2,108,000  for  the  special  improvement  and  equipment  funds.  As 
there  were  no  appropriations  from  earnings  in  1905,  the  addit:  mal 
amount  turned  back  into  the  road  in  1Q06  was  $4,400,000. 

Improvements  from  Earnings. 

From  the  surplus  of  1902  the  sum  of  $1,104,544  was  appro- 
priated for  additions  and  improvements,  and  in  1906.  $2,108,279. 


ROCK  ISLAND  623 

There  were  no  such  special  appropriations  in  1903  and  1904;  in 
1903  the  sum  of  $1,018,231  was  charged  off  for  depreciation  of 
structures  and  equipment  and  deducted  from  the  capital  account. 

Surplus  Earnings. 

The  surplus  earnings  of  the  Railway  Co.  available  for  dividends 
and  improvements  for  six  years  have  been  as  follows : 

Per  cent,  earned  on 

Year.  Amount.  common  stock. 

1900-1 $5,097,018  10.1  . 

1901-2 7,220,941  12.0 

1902-3 9,572,911  12.7 

1903-4 6,028,198  8.0 

1904-5 4,733,109  6.3 

1905-6 6,785,832  9.0 

By  the  close  of  the  fiscal  year  of  1905  practically  93%  of  the 
railway  company's  stock,  and  all  of  the  St.  Louis  and  San  Fran- 
cisco common  had  been  exchanged.  The  interest  charged  on  the 
two  sets  of  collateral  trust  bonds  issued  by  the  Railroad 
amounted  to  $3,495,113  in  1905  and  $3,664,441  in  1906. 

As  the  San  Francisco  stock  paid  no  dividends  it  was  needful 
that  the  Railway  company  declare  a  dividend  of  5%%  on  its 
stock  in  order  that  the  Railroad  company  might  meet  its  fixed 
charges.  Deducting  this  percentage  from  the  percentage  earned 
on  the  Railway  stock,  it  will  be  seen  that  the  company  barely 
earned  its  fixed  charges  in  1905.  The  4%  dividend  declared  in 
that  year  was  paid  by  means  of  a  special  dividend  of  1.63%  from 
a  surplus  fund  of  the  railway. 

Had  all  of  the  surplus  earned  by  the  Railway  in  1906  been 
paid  out  in  dividends,  the  Railroad  company's  share  would  have 
meant  an  income  of  about  $6,300,000,  which,  after  deduct- 
ing interest  charges  on  the  collateral  trust  bonds,  would  have  left 
$2,600,000.  nr  sufficient  to  have  paid  the  full  4%  on  the  preferred 
and  left  a  balance  of  about  $600,000.  equivalent  to  about  two- 
thirds  of  one  per  cent,  on  the  common.  Instead  of  this,  only  one 
per  cent,  was  paid  during  the  year  on  the  preferred  and  as  al- 
ready noted.  $2,108,000,  practically  all  the  balance,  was  appro- 
priated for  improvements. 


624  ROCK  ISLAND 

Dividend  Record. 

In  the  old  days  the  Rock  Island  was  a  big"  dividend  earner. 
It  paid  as  high  as  10%  in  1879;  in  1880  there  was  a  stock  dividend 
of  100%,  but  in  the  face  of  this  the  road  continued  to  pay  8%  up 
to  1888,  or  the  equivalent  of  16%  on  the  original  stock.  The 
dividend  was  cut  down  to  3%  in  1891,  and  in  1895  to  2%,  so  con- 
tinuing to  1896.  In  1898,  4^%  was  paid,  and  from  1899  to  1902, 
the  year  of  the  recapitalization,  5%.  The  Railway  company  paid 
7j/2%  in  1903;  8^%  in  1904;  6%  and  1.63%  extra  in  1905,  and 
6*4%  in  1906.  Three  per  cent,  was  paid  on  the  Rock  Island  Com- 
pany preferred  in  1903,  the  full  4%  in  1904  and  1905,  and  one  per 
cent,  -in  1906. 

No  dividends  have  been  paid  on  Rock  Island  common. 

The  Balance  Sheet. 

From  the  current  assets  shown  in  the  balance  sheet,  there 
have  been  deducted  the  equipment  trusts  (two  series)  of  the 
Rock  Island  Improvement  Company,  with  the  treasury  securities 
already  included  in  the  table  of  capital  account  above,  materials  on 
hand  and  advances  to  coal  companies,  in  conformity  with  the  pro- 
cedure in  this  book. 

These  deductions  made,  the  current  assets  showed $11,256,005 

and  current  liabilities 7,140,201 

leaving  a  working  balance  of $4,115,804 

In  addition  to  the  above  there  were  deferred  assets  of  $1,- 
163,788,  and  deferred  liabilities  amounting  to  $3,032,532  and  open 
accounts  in  suspense,  $509,364.  Adding  together  these  various 
items,  the 

Current  Assets  amounted  to $12,419,793 

And  the  Current  Liabilities  to 10,682,097 

Leaving  a  balance  of $1,737,696 

The  item  of  cash  on  hand  was  $7,148,301  and  the  balance  to 
credit  of  Profit  and  Loss,  $17,202,469. 

Investment  Value. 

The  stock  of  the  C.  R.  I.  and  P.  Railway  outstanding  has  re- 
ceived since  the  reorganization  29.13%,  or  an  average  of  7.28% 


ROCK  ISLAND  625 

for  the  four  years.  In  1906  the  dividend  was  6^4%-  Were  this 
stock  converted  it  would  receive  in  exchange  $100  in  4%  col- 
lateral trust  bonds  secured  by  a  deposit  of  the  stock,  average 
price  in  1906  about  $79 ;  $70  preferred  stock,  of  an  average  price 
of  $65  per  share,  equivalent  to  $45  in  the  exchange,  and  $100 
Rock  Island  common,  of  an  average  market  price  of  about  $26; 
or  securities  to  an  average  market  value  of  $150  for  each  $100 
share. 

The  dividend  on  this  stock  must  be  paid  or  the  Railroad  Com- 
pany, and  hence  the  Rock  Island  Company,  receives  no  income,  and 
failing  this  would  default  the  interest  on  the  collateral  trust  bonds. 
The  amount  of  surplus  at  the  close  of  the  fiscal  year  for  the  rail- 
road company  was  only  $257,286,  and  for  the  Rock  Island  Company, 
$39,271.  As  the  security  on  the  collateral  trust  bonds  was  no  better 
than  on  the  dividend  on  the  Railway  stock,  and  the  interest  on  the 
bonds  only  4%,  there  was  on  the  prices  of  1906  but  little  temptation 
to  convert  the  Railway  stock. 

All  the  Railroad  stock,  as  already  noted,  is  owned  by  the  Rock 
Island   Company. 

The  preferred  stock  of  the  Rock  Island  .Company  is  entitled 
to  4%  dividends,  non-cumulative  up  to  and  including  1909,  there" 
after  at  the  rate  of  5%  to  1916,  and  after  that  at  the  rate  of  6%. 
Furthermore  the  preferred  stockholders  are  entitled  to  elect  a 
majority  of  the  board  of  directors,  and  the  Rock  Island  board 
controls,  of  course  absolutely,  the  Railway  company.  The  re- 
sumption of  dividends  on  the  preferred  stock  depends  entirely 
on  whether  the  favorable  results  of  1906  continue  to  be  shown. 
If  they  should  this  stock  would  tend  to  sell  well  up  towards  the 
■full  amount  to  which  a  4%  preferred  is  entitled,  on  account  of  the 
fact  that  the  stock  carries  control  of  the  system.  It  is  to  be  noted 
however,  that  the  railway  company's  charges,  taxes  and  interest, 
have  tended  to  increase  more  rapidly  than  the  earnings,  with  the 
result  that  the  surplus  shown  by  the  company  on  its  stock  was  in  1905 
only  about  half  of  that  shown  the  year  of  and  the  year  preceding 
the  reorganization. 

It  follows  naturally  from  this  that  the  prospects  for  a  divi- 
dend on  the  common  stock  in  1906  were  remote,  and  inasmuch  as 
the  stock  has  no  value  for  purposes  of  control,  it  represents  noth- 
ing but  possibilities. 

1905  and  1906  were  for  the  Southwest  and  the  territory  cov- 
ered  by    the   Rock    Island    lines,   years    of   extraordinary   prosper- 

40 


626  ROCK  ISLAND 

ity,  indicated  by  the  opening  of  an  enormous  number  of  small 
banks  and  a  great  rise  in  farm  values.  In  1906  home-seeking  ex- 
cursions on  the  Rock  Island  in  one  day  carried  9,000  people. 
This  has  all  the  earmarks  of  the  traditional  "boom"  which  in 
years  heretofore  has  preceded  a  drastic  setback.  Even  in  the 
flush  year  of  1906,  fixed  charges  on  the  Rock  Island  consumed 
83%  of  the  total  net  income.  It  will  be  seen  that  this  road  is  not 
in  as  favorable  a  position  to  meet  a  possible  depression  as  other 
roads  like  the  Burlington,  the  North  Western,  etc.,  whose  fixed 
charges  consume  considerably  less  than  one-half  of  the  available 
income. 


RUTLAND  RAILROAD. 

The  Rutland  is  mainly  a  Vermont  line,  operating  a  single- 
track  road  from  Chatham,  N.  Y.,  and  Bellows  Falls,  Vt,  to  the 
Canadian  border  and  to  Ogdensburg  on  the  St.  Lawrence  River. 
It  represents  the  reorganization  in  1867  of  the  old  Rutland  and 
Burlington  R.  R.,  and  the  absorption  of  several  small  roads,  in- 
cluding, since  then,  the  Ogdensburg  and  Lake  Champlain  road. 
Under  traffic  agreements,  the  passenger  trains  of  the  company 
are  run  through  to  Montreal  over  the  Ouebec  Southern  and  Cana- 
dian  Pacific.  At  the  beginning  of  1905  the  road  passed  definitely 
into  the  control  of  the  New  York  Central,  the  latter  having  pur- 
chased a  majority  of  the  stock.  Part  of  the  old  directorate  re- 
signed, and  New  York  Central  directors  were  chosen  in  their 
stead.  It  is  now  officered  by  New  York  Central  men,  and  is  a 
part  of  the  New  York  Central  system. 

Capitalization. 

At  the  close  of  1906  the  capital  account  stood  as  follows : 

Common  stock $199,400 

Preferred    stock 9,057,600 

Total   "$9^577000 

Funded  debt 12,003,819 

Nominal  capital $21,260,819 

Rentals  cap.   at  4% 475,000 

Approx.  gross  capital $21,735,819 

Securities  held 1,746.880 

Approximate  net  capital $19,988,939 

Approximate  capitalization  per  mile $42,711 

Miles    operated 468 

Net  earnings  on  net  capital 4.1% 

Stock  on  net  capital 46% 

Fixed  Charges  on  total  net  income 69% 

Factor  of  Safety 31  % 

(627) 


628 


RUTLAND 


Considering  the  earnings,  the  capitalization  is  high,  and  the 
net  earnings  for  1906  showed  only  4.1%  on  the  estimated  net 
capital. 

The  stock  represents  46%  of  the  net  capital. 

Fixed  charges  consumed  69%  of  the  total  net  income,  leaving 
a  Factor  of  Safety  for  the  securities  of  the  road  of  only  about  31%. 

The  peculiar  feature  of  the  capitalization  is  that  the  old 
common  stock  has  almost  all  been  converted  into  preferred  stock, 
at  the  rate  of  ten  shares  of  common  for  one  of  preferred,  and  this 
preferred  stock  is  a  cumulative  7%  stock.  As  nothing  like  these 
dividends  have  been  earned  for  years,  the  accumulated  dividends 
amount  to  rather  more  than  half  again  as  much  as  the  entire  capi- 
tal stock,  that  is  to  say,  to  about  160%.  These  arrearages  could 
only  be  paid  by  a  stock  or  bond  issue  which  would  merely  further 
dilute  the  capitalization. 

In  ten  years  the  mileage  of  the  road  has  increased  from  135 
to  415  miles  and  in  addition  to  the  latter  figure,  there  are  52  miles 
of  road  operated  under  trackage  rights.  Within  the  same  period 
the  gross  earnings  have  risen  from  $713,000  to  $2,799,209  in  1906. 
That  is  to  say,  the  gross  earnings  have  just  about  increased  with  the 
mileage. 

Maintenance. 

The  expenditures  on  maintenance  for  six  and  a  half  years 
show  as  follows : 


Year 

Traffic  Density 

Maint< 

jnance 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1905* 

1906 

406,730 
374,061 
377,486 
373,084 
428,980 
427,069 

$632 
634 
715 
728 
810 
966 

$520 
426 
566 
773 
703 
813 

$1,152 
1,060 
1,281 
1,501 
1,513 
1.779 

Average.  . . . 

397,901 

$747 

$633 

$1,380 

•Fiscal  year  changed  to  calendar  year. 

In  1901  new  stock  was  sold  to  pay  off  the  floating  debt  and 
to  provide  for  improvements  ;  $565,000  was  credited  to  a  special 
improvement  fund  and  this,  together  with  $217,000  more  has 
been  expended  up  to  1904.  In  1903  all  of  the  surplus  was  devoted 
to  the  same  purpose;  in  1904  $103,000;  and  the  reports  state  that 
$77,000  was  expended  for  improvements  and  charged  to  expenses 
during  1905,  and  $29,985  in  1906. 


RUTLAND  629 

The  surplus  earnings  in  1906  amounted  to  $249,729  as  against 
$290,847  the  year  before.  From  this  $100,000  is  applied  annually 
for  the  redemption  of  equipment  bonds,  leaving  a  balance  avail- 
able for  the  dividend  in  1906  of  $149,729,  equal  to  about  the  1^% 
dividend  paid. 

Dividend  Record. 

The  road  formerly  paid  dividends  as  follows : 

Year 1892-5     1896     1897     1898-9     1900     1901     1902     1903 

% 4  2  1  2  3         4  3  1 

In  1903  the  dividends  were  suspended  in  order  that  all  of  the 
surplus  earned  might  be  devoted  to  improvements  on  the  road, 
and  this  was  followed  through  1904.  In  1905  a  dividend  of  1>^% 
was  declared  and  the  same  in  1906. 

Investment  Value. 

The  preferred  stock  is  entitled  to  7%  cumulative  dividends, 
and  as  this  has  not  been  earned  the  common  stock  can  have  no 
other  value  than  for  voting  purposes.  The  surplus  shown  in 
1905  and  1906  did  not  hold  out  any  large  prospects  for  an  in- 
crease of  dividend.  The  preferred  sold  down  as  low  as  $30  a 
share  in  1904,  rising  again  to  $72  a  share  in  1905.  Except  for  the 
purpose  of  ensuring  control,  the  stock  is  certainly  very  dear 
at  the  latter  figure.  On  the  basis  of  $33  a  share,  paying  a  1^% 
dividend,  it  would  yield  to  the  investor  4j/^%,  with  a  mild  specu- 
lative chance  of  appreciation.  It  is  a  stock  that  is  rather  widely 
distributed,  for  so  small  a  road,  the  company  reporting  over  a 
thousand  stockholders  in  1905.  This  for  the  minority  interest, 
would  mean  an  average  of  less  than  $5,000  per  shareholder.  It  is 
distinctively  not  the  New  York  Central  policy  to  declare  high 
dividends,  and  under  the  control  of  the  latter  the  policy  of  utilizing 
the  larger  part  of  the  surplus  for  the  improvement  of  the  road  will 
likely  be  continued. 


ST.  LOUIS  AND  SAN  FRANCISCO  RAILROAD. 

The  "Frisco,"  as  it  is  commonly  known,  is,  so  far  as  its 
present  lines  run,  curiously  misnamed,  since  it  does  not  extend  to 
or  towards  San  Francisco  but  lies  southerly  from  St.  Louis  and 
Kansas  City  to  the  gulf,  with  a  line  reaching  to  Birmingham  in 
Alabama. 

Since  1903  the  Frisco  has  been  a  part  of  the  Rock  Island 
system,  the  Rock  Island  in  that  year  acquiring  almost  the  entire 
amount  of  outstanding  common  stock,  and  with  it  control  of  the 
road.  In  1906  it  operated  5,069  miles,  the  subsidiary  Chicago  & 
Eastern  Illinois,  and  its  subsidiary,  the  Evansville  &  Terre  Haute 
lines  being  operated  separately.  All  told,  it  controlled  over  6,000 
miles  of  road,  lying  in  eleven  different  states. 

History. 

The  present  St.  Louis  &  San  Francisco  Railroad  is  a  suc- 
cessor in  1896  of  the  Railway  of  the  same  name.  The  latter  had 
been  organized  to  build  a  Pacific  line  and  in  the  wreck  of  the  old 
Atlantic  &  Pacific  took  over  a  part  of  its  lines  running  from  St. 
Louis  to  Vinita.  In  1882  Gould  and  Huntington  obtained  control 
of  the  road  simply  with  the  idea  of  stopping  further  construction. 
They  sold  out  to  the  Atchison,  which  took  over  control  in  1890. 
In  the  Atchison  collapse,  the  St.  Louis  &  San  Francisco  itself 
went  into  the  hands  of  receivers  and  was  reorganized  to  form  the 
present  company,  with  1,282  miles  of  road.  Subsequently,  by  the 
lease  or  purchase  of  various  small  lines,  the  Kansas  Midland,  the 
Kansas  City,  Osceola  &  Southern,  the  Central  division  of  the 
Atlantic  &  Pacific,  etc.,  the  mileage  of  the  company  was  rapidly 
enlarged,  and  in  1901  the  Kansas  City,  Fort  Scott  &  Memphis 
and  the  Kansas  City,  Memphis  &  Birmingham  lines  were  ac- 
quired, which,  with  various  extensions  has  brought  the  system 
up  to  its  present  proportions. 

In  1905  all  of  the  common  and  the  larger  part  of  the  pre- 
ferred stock  of  the  Chicago  &  Eastern  Illionis  was  acquired, 
carrying  with  it  control  of  the  Evansville  &  Terre  Haute  and  the 
Evansville  &  Indianapolis  lines. 

(630) 


ST.  LOUIS  &  SAN  FRANCISCO  631 

Ownership. 

The  executive  committee  of  the  Frisco  is  the  same  as  that 
of  the  other  associated  companies  in  the  Rock  Island  system  and 
its  directorate  is  very  much  the  same,  including  in  1906  Win.  H. 
Moore,  James  H.  Moore,  D.  G.  Reid,  chairman,  B.  F.  Yoakum, 
chairman  of  the  Executive  Committee,  A.  J.  Davidson,  presi- 
dent, Robert  Mather,  first  vice-president,  Francis  L.  Hine, 
vice-president  of  the  First  National  Bank,  New  York,  H.  Clay 
Pierce,  president  of  the  Pierce-Waters  Oil  Co.,  Win.  K.  Bixby, 
James  Campbell,  Nathaniel  Thayer,  Benjamin  P.  Cheney  and  C. 
W.  Hillard. 

For  the  $28,904,300  of  common  stock  held  by  the  Rock 
Island,  that  company  paid  per  hundred  dollar  share,  $60  in  5% 
Chicago,  Rock  Island  &  Pacific  gold  bonds,  and  an  equal  amount 
of  Rock  Island  Company  common  stock.  No  dividends  have 
ever  been  paid  on  the  Frisco  common  stock,  and  the  average 
price  of  the  stock  at  the  generally  high  level  in  the  boom  year 
of  1902  was  about  equal  to  the  amount  paid  for  the  stock  in  gold 
bonds.  The  actual  value  of  the  Rock  Island  holdings  is  indi- 
cated in  the  analysis  which  follows. 

Capitalization. 

As  of  June  30th,  1906,  the  capital  account  of  the  St.  Louis 
&  San  Francisco,  proper,  excluding  the  Chicago  &  Eastern  Illi- 
nois, stood  as  follows : 

Common   stock $  29,000,000 

1st  Pref 5,000,000 

2d   Pref 16,000,000 

Total  stock $  50,000,000 

Funded  debt  St.  L.  &  S.  F 113,846,428 

Funded  debt,  K.  C.  F.  S.  &  M 37,989,604 

Funded  debt,  Auxiliary  lines  (net)....  16.170,420 

Guaranteed   stock 13,510,000 

Equip.  Trusts 7,512,325 

Chi.  &  East  111.  Certificates 27,362,050 

Total  capital $266,390,827 

Securities  held 29,614,410 

Approx.  net  capitalization $236,776,417 


632  ST.  LOUIS  &  SAX  FRANCISCO 

Approx.  net  capital,  per  mile $46,710 

Average   miles   operated 5,069 

Net  earnings  on  net  capital 4.8% 

Stock   on   net   capitalization 21% 

Fixed  charges  on  total  net  income 82% 

Factor  of  safety 18% 

It  will  be  seen  that  the  capitalization  for  a  Mississippi  Val- 
ley line  is  high.  The  average  of  $46,710  compares  with  $49,790 
for  the  Illinois  Central  and  $39,684  for  the  Louisville  &  Nash- 
ville ;  and  the  mileage  earnings  of  both  these  roads  are  about 
twice  that  of  Frisco.  The  average  capitalization  of  the  Burling- 
ton, Chicago  &  North  Western  and  the  St.  Paul  roads  is  about 
$30,000  per  mile  and  the  average  earnings  of  these  roads  is  50% 
above  that  of  the  Frisco. 

The  fact  of  high  capitalization  is  further  illustrated  in  the 
percentage  which  the  net  earnings  show  on  the  net  capital,  the 
Frisco's  4.8%,  comparing  with  7.9%  on  the  Illinois  Central, 
8.9%  on  the  Louisville  &  Nashville. 

It  will  be  seen  also  that  the  percentage  of  fixed  charges  is 
high — far  above  the  danger  point  for  a  Western  road.  Its  82% 
compares,  for  example,  with  47%  for  the  Illinois  Central,  53% 
(after  very  high  maintenance  charges)  for  the  Louisville  and 
Nashville,  and,  to  go  further  afield,  33%  on  the  Union  Pacific,  29% 
on  the  Northern  Pacific,  etc. 

By  reference  to  the  maintenance  charges  it  will  be  seen 
further  that  the  average  maintenance  charges  of  the  Frisco  are 
low,  and  were  especially  so  in  1906,  and  that,  had  it  been  main- 
tained at  something  like  the  general  level  of  other  prosperous 
roads  in  this  section,  a  considerable  part  of  the  surplus  shown 
would  have  been  wiped  out,  so  that  the  actual  margin  of  safety 
on  the  underlying  securities  was  really  much  less  than  the  nomi- 
nal 18%  shown  in  1906. 

It  will  likewise  be  noted  that  the  larger  part  of  this  enor- 
mous capitalization  is  in  bonds  and  that  a  very  small  per  cent, 
is  stock,  the  two  having  the  rather  unusual  proportion  of  four 
to  one. 

Equities  Owned. 

The  chief  treasury  holding  was  $7,217,800,  par  value  of  the 
common  stock  of  the  Chicago  6c  Eastern  Illinois,  and  $6,050,400 


ST.  LOUIS  &  SAN  FRANCISCO  633 

of  the  preferred  stuck.  The  $7,200,000  of  common  stuck  is  car- 
ried on  the  hooks  at  a  cost  of  $18,230,237  and  the  $6,000,000  of 
preferred  at  a  cost  of  $9,321,550.  These  stocks  were  acquired 
in  1905,  heing  exchanged  for  stock  trust  certificates  of  an  equal 
par  value.  These  certificates  bore  interest  at  the  rate  of  6% 
for  the  preferred  and  10%  for  the  common,  and  were  redeemable 
up  to  1942  at  the  rate  of  $250  for  each  share  of  common  and  $150 
for  each  share  of  preferred.  Later,  the  larger  part  of  the  com- 
mon stock  trust  certificates  were  exchanged  for  others  of  a  par 
value  of  $1,000,  each  representing  the  deposit  of  four  shares  of 
stock,  and  redeemable  at  par.  The  interest  rate  on  these  latter 
certificates  is  4%,  so  that  both  income  and  principal  were  un- 
changed. 

In  1906  the  Chicago  &  Eastern  Illinois  paid  6%  on  its  pre- 
ferred stock  and  8%  on  the  common,  so  that  on  the  common 
stock  trust  certificates  the  St.  Louis  &  San  Francisco  was  paying 
2%  more  in  interest  than  it  received  in  income  on  the  stock. 
Further  reference  to  the  anaylsis  of  the  Chicago  &  Eastern  Illi- 
nois will  show  that  its  maintenance  charges  were  very  consid- 
erably below  those  of  its  competitors,  to  the  extent  of  from  $500 
to  $900  per  mile.  Had  the  road  charged  itself  not  more  than  $500 
per  mile  additional  for  upkeep,  this  would  have  wiped  out  prac- 
tically the  entire  amount  available  for  the  common  stock  divi- 
dends, so  that,  practically  speaking,  the  Frisco  paid  $250  per 
share  in  certificates  and  is  paying  4%  interest  on  this  amount, 
for  stock  which,  on  equal  maintenance  with  roads  in  the  same 
territory,  is  scarcely  earning  any  dividend  at  all.  Even  as  it 
was,  the  payment  of  the  8%  dividend  on  the  C.  E.  I.  common 
wiped  out  practically  all  the  surplus  for  the  year.  It  follows  that 
the  Frisco's  equity  in  these  holdings  was  a  debit  at  least  equal 
to  2%  on  the  par  value  of  the  C.  E.  I.  common  stock,  and  actually 
much  more  than  this  if  maintenance  charges  be  considered.  This 
was  not  a  healthy  situation  for  a  road  whose  own  fixed  charges, 
after  rather  low  maintenance  charges,  amounted  in  the  tremen- 
dous boom  year  of  1906  to  82%. 

In  this  connection  may  be  noted  also  the  purchase  of  the 
Kansas  City,  Fort  Scott  &  Memphis  and  the  Kansas  City,  Mem- 
phis &  Birmingham  lines.  These  roads,  now  forming  a  part  of 
the  Frisco  lines,  are  carried  on  the  books  at  a  valuation  of 
around  $81,000,000,  and,  actually,  nearly  $65,000,000  of  bonds 
and  guaranteed  stocks  are  outstanding  on  these  two  lines,  with 


6.54 


ST.  LOUIS  &  SAN  FRANCISCO 


a  total  of  1,200  miles  of  track.  This  is  equivalent  to  a  book 
valuation  of  nearly  $70,000  per  mile  and  the  equivalent  of  a 
bonded  debt  in  excess  of  $53,000  per  mile.  This  latter  is  very 
nearly  twice  the  total  stock  and  bond  capitalization  of  other 
Mississippi  roads  like  the  St.  Paul,  the  North  Western  or  the 
Burlington,  all  with  very  much  higher  mileage  earnings.  This 
is  one  of  the  items  which  help  to  explain  the  Frisco's  82%  of 
fixed  charges  in  1906. 

Increase  of  Capitalization. 

Since  June  30th,  1900,  the  amount  of  the  company's  stock 
outstanding  has  not  been  increased,  while  the  funded  debt  was 
increased  from  $45,014,225  to  $216,390,827.  This  was  a  total 
increase  of  capital  of  180%.  At  the  same  time  gross  earnings 
rose  from  $7,983,246  to  $32,046,656,  or  more  than  400%.  This 
is  a  very  favorable  showing,  but  if  we  disregard  the  $50,000,000 
of  capital  stock  which  probably  represented  little  investment  of 
actual  capital  and  consider  only  the  increase  of  funded  debt,  it 
will  be  seen  that  the  latter  increased  by  470%,  or  more  rapidly 
than  earnings. 

Character  of  Traffic. 

Covering  so  broad  a  territory,  the  Frisco  has  naturally  a 
diversified  traffic.  Of  its  total  tonnage  in  1906  about  20%  was 
farm  products,  12%  manufactures,  nearly  19%  lumber,,  and 
about  40%  products  of  mines.  The  average  earnings  per  ton 
mile  are  high,  amounting  to  1.0c.  in  1905  and  .95c.  in  1906. 

Stability  of  Earnings. 

The  following  table  exhibits  the  rapid  increase  of  mileage 
and  earnings  in  the  eleven  years  under  view : 


Year 


1895-6. 
1896-7. 
1897-8. 
1898-9. 
1899-0. 
1900-1. 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1950-6. 


Miles  Operated 

Gross  Earnings 

Per  Mile 

1,163 

$6,059,372 

$5,210 

1,163 

g5, 993,336 

5,253 

1,221 

16,786,468 

5,640 

1,334 

£7,226,662 
%7, 983,246 

5,417 

1,400 

5,702 

1,687 

10,173,697 

*6,032 

3,252 

21,620,882 

6,648 

3,675 

24,289,510 

6,609 

4,217 

26,S96,731 

6,378 

5,030 

29,958,240 

5,955 

5,069 

32,046,656 

6,322 

*  Includes  Kansas  City,  Fort  Scott  &  Memphis  Railway,  etc. 


ST.  LOUIS  &  SAN  FRANCISCO 


635 


It  will  be  seen  that  the  gross  earnings  per  mile  have  risen 
very  little  within  tins  period  and  actually  were  higher  in  1003 
than  in  1006,  owing-  to  extensions  and  the  inclusion  of  new 
lines. 

Maintenance. 

Like  the  gross  earnings,  the  traffic  density  of  the  line  has 
in  the  six  years  from  1900  remained  very  nearly  at  a  standstill. 
It  was  higher  in  1902  than  in  any  subsequent  year.  The  follow- 
ing table  exhibits  the  maintenance  charges  for  the  period: 


Maintenance  per  Mile 

Year 

Traffic  Density 

Total 

Way 

Equipment 

1900-1 

406,321 

$781 

$567 

$1,348 

1901-2 

503,553 

916 

680 

1,596 

1902-3 

473,359 

935 

711 

1,646 

1903-4 

456,012 

743 

810 

1,553 

1904-5 

397,539 

714 

701 

1,415 

1905-6 

454,969 

798 

751 

1,549 

Average.  .  .  . 

448,625 

$814 

$703 

$1,517 

St.  L.  S.  W .  .  . 

408,066 

1,023 

674 

1,697 

M.  K.  T 

495,226 

1,121 

616 

1,737 

K.  C.  Sou 

837,406 

961 

1,156 

2,117 

Atchison 

577,005 

1,123 

1,113 

2,236 

Rock  Island. . . 

462,106 

1,022 

759 

1,787 

It  will  be  seen  that  there  has  been  practically  no  increase 
in  the  expenditures  per  mile  in  spite  of  the  well-known  increase 
in  the  cost  of  labor  and  supplies,  so  that  the  road  could  scarcely 
have  been  as  well  maintained  in  1906  as  in  previous  years. 
Moreover,  by  comparison  with  other  roads  in  the  same  section, 
it  will  be  seen  that  the  Frisco's  charges  were  lower.  Its 
average  was  more  than  $250  per  mile  less  than  the  Rock  Island, 
with  about  the  same  traffic  density,  more  than  $200  less  per 
mile  than  the  Missouri,  Kansas  &  Texas,  and  very  considerably 
below  the  Kansas  City  Southern  or  the  Atchison,  traffic  den- 
sity compared.  In  1906  this  difference  became  still  more  accen- 
tuated. In  that  year  the  Frisco's  charges  were  $400  per  mile 
below  the  St.  Louis  &  Southwestern,  $350  below  the  Missouri, 
Kansas  &  Texas,  about  $400  below  the  Rock  Island,  and  the 
difference  between  the  Kansas  City  Southern  and  the  Atchison 
was  still  greater.  It  seems  safe  to  say  that  on  the  average  the 
Frisco's  charges  were  about  $400  per  mile  for  1906  lower 
than  other  roads  of  the  same  character  and  in  much  the  same 
territory,    and   this   sum    distributed    over   5,000   miles   of   track 


636 


ST.  LOUIS  &  SAN   FRANCISCO 


would   have   been    equivalent    to  $2,000,000.     This   is   very   neai 
to  the  entire  surplus  shown   for  the  year. 

Moreover,  while  other  roads  have  turned  back  large  sums 
from  earnings  each  year  into  improvements,  no  such  separate 
appropriations  appear  in  the  reports  of  the  Frisco,  although  for 
the  fiscal  year  of  1906  $1,789,393  of  surplus  earnings  was  carried 
to  the  credit  of  profit  and  loss. 

Surplus  Earnings. 
On  the  hasis  of  the  maintenance  charges  discussed  above, 
the  nominal  surplus  shown  for  the  six  years,  from  1901,  was  as 
follows : 


Year 

Surplus 

Dividends 
paid  on  1st 
Preferred 

Per  cent. 

earned  on 

2nd  Prefer' d 

Dividends 

paid  on  2nd 

Preferred 

Average 

price  2d 

Preferred 

1900-1.. 
1901-2. . 
1902-3. . 
1903-4.. 
1904-5. . 
1905-6.. 

$1,809,856 
2,287,479* 
1,474,717 
1,280,356 
1,024,128 
2,309,125 

4 
4 
4 
4 
4 
4 

10. 

13. 
7.9 
6.7 
5.1 

13.1 

3* 
4 
4 
4 

4 
2 

81 
83 
78 
70 

74 
68 

*  Includes  Kansas  City,  Fort  Scott  &  Memphis  Railway. 

For  1906  the  surplus  shown  was  equivalent  to  the  full  4% 
on  both  the  first  and  second  preferred  stocks  and  to  5.0%  on 
the  common  stock.  Had  maintenance  charges  been  higher,  this 
would  have  been  an  excellent  showing.  As  it  was,  the  showing 
was  somewhat  misleading. 

Dividend  Record. 

The  dividends  on  the  stocks,  both  of  the  old  company  and 
the  new  since  1881,  have  compared  as  follows. 

Year.                                            1st  Pfd.  2d.  l'fd. 

1881-6 7 

2y2 


1887 

7 

1888-9 

7 

1890-6 

1897 

2 

1898 

4 

1898 

4 

1899-0 

4 

1901 

4 

1902-6 

4 

1 

2 

2 

4 
In  1906  the  dividend  on  the  second  preferred  was  passed. 


ST.  LOUIS  &  SAN  FRANCISCO  637 

The  Balance  Sheet. 
Included  in  the  current  assets  of  June  30th,  1906,  were  securi- 
ties in  the  treasury,  carried  at  a  cost  of  $849,778  and  advances 
on  account  of  construction  of  $954,295.  Excluding  these  items 
and  likewise  the  item  of  supplies  on  hand,  in  pursuance  of  the 
policy  of  this  book,  the  sheet  showed : 

Current    Assets $7,769,025 

Current    Liabilities 8,622,591 

Leaving  a  debit  balance $   853,566 

Even  adding  in  the  value  of  securities  held  in  the  treasury 

and  the  amounts  advanced  for  construction,  it  will  be  seen  that 

the  company  was  not  well  off  for  working  funds  and  that  an  issue 

of  bonds  or  notes  was  obviously  suggested. 

The  amount  of  cash  on  hand  amounted  to  $3,641,537,  and 

the  balance  to  credit  of  profit  and  loss  was  $3,470,978. 

Investment  Value. 

Both  the  first  and  second  preferred  are  entitled  to  a  4%  non- 
cumulative  dividend,  and  both  these  stocks  are  redeemable  at  par 
at  the  option  of  the  company.  The  amount  of  first  preferred  is 
small— only  $5,000,000— so  that  only  $200,000  per  annum  is 
required  for  the  full  dividend  on  this  stock.  Nevertheless,  the 
fact  that  the  fixed  charges,  even  after  low  maintenance,  con- 
sumed so  large  a  percentage  of  the  total  net  income  (82%),  even 
in  the  prosperous  year  of  1906,  tended  very  seriously  to  depress 
the  value  of  this  stock,  and  in  the  slump  of  March,  1907,  it  sold 
at  $59  per  share.  This  compared  with  a  top  price  of  $72  per 
share  in  1906  and  $90  per  share  in  1902. 

The  amount  of  second  preferred  is  more  than  three  times 
that  of  the  first.  The  passing  of  the  dividend  in  1906  tended  to 
still  further  depress  the  price  of  this  stock,  and  it  fell  to  $34  per 
share  in  March.  1907.  This  compared  with  a  high  point  of  $51  in 
1906  and  $80  per  share  in  1902. 

Nominally,  at  least,  the  full  4%  on  the  second  preferred,  as 
well  as  the  first,  was  amply  earned  in  1°)06,  and  the  passing  of 
the  dividend  under  the  circumstances — that  is,  the  company's 
need  of  working  capital,  was  rather  to  the  credit  of  the  manage- 
ment than  otherwise.  But  if  in  such  a  year  of  prosperity  as 
1906  it  was  deemed  unwise  to  pay  a  dividend,  it  was  not  very 
clear  that  a  resumption  of  the  dividend  was  in  prospect. 


638  ST.  LOUIS  &  SAN  FRANCISCO 

The  nominal  surplus  for  the  six  years,  on  the  basis  of  the 
rather  low  maintenance  charges  noted,  was  sufficient  to  leave  about 
2%  per  annum  for  the  common  stock.  On  what  ground  the  Rock 
Island  was  justified  in  paying  $17,342,580  in  5%  gold  bonds,  and  an 
equal  amount  of  Rock  Island  Company  stock,  or  $120  per  share, 
nominally,  for  stock  then  earning  little  or  nothing,  and  earning 
little  more  since,  is  not  very  clear,  especially  as  the  interest  on  the 
bonds  brought  the  Rock  Island's  fixed  charges  up  to  83%  in  the 
phenomenally  prosperous  year  of  1906.  This  purchase  takes  $867,- 
000  per  year  from  the  Rock  Island's  treasury,  with  scant  prospects 
of  any  return  for  some  years.  In  the  four  years,  the  sellers  of  this 
stock  received  over  $3,000,000  in  interest,  where  they  otherwise 
would  have  received  nothing. 

As  for  the  underlying  securities,  it  is  obvious  from  the 
foregoing  that  the  margin  of  safety  on  these  was  not  large,  and 
this  fact  tended  greatly  to  depress  their  price. 


ST.  LOUIS  SOUTHWESTERN  RAILWAY. 

The  St.  Louis  Southwestern,  otherwise  known  as  the  "Cotton 
Belt  Route,"  is  one  of  the  Gould  lines  that  is  not,  however,  an 
integral  part  of  what  is  known  as  the  Gould  system.  Its  affiliations 
with  the  other  Gould  roads  are  naturally  close,  but  it  does  not 
belong  to  the  more  immediate  group  of  lines  of  which  George  Gould 
is  the  directing  head. 

The  road  for  many  years  belonged  in  the  class  that  begins  not 
much  of  anywhere,  and  pursued  a  devious  path  to  a  similar  destina- 
tion. Its  lines  extended  from  southern  Missouri  across  Arkansas 
into  northeastern  Texas.  Of  late  years,  however,  the  position  of 
the  road  has  been  very  materially  improved,  and  in  1905  saw  the 
completion  of  the  new  bridge,  in  which  this  company  has  a  one- 
fifth  proprietory  interest,  across  the  Mississippi — between  Gray's 
Point,  Missouri,  and  Thebes,  Illinois.  This  gives  the  road  access  to 
St.  Louis,  through  arrangements  already  made  for  the  joint  use  of 
the  Illinios  division  of  the  Iron  Mountain  road,  for  freight  and 
passenger  trains  between  Thebes  and  St.  Louis.  A  short  bit  of 
road  gives  the  line  entrance  into  Memphis,  and  other  traffic  arrange- 
ments have  carried  its  terminals  to  Sherman,  Fort  Worth,  Dallas 
and  other  prosperous  towns  in  Texas,  and  the  line  will  eventually 
be  carried  to  a  Gulf  terminal. 

All  this  is  very  strikingly  different  from  the  line  which  from 
1885  to  1890  was  twice  sold  under  foreclosure.  The  present  road 
represents  a  reorganization  in  1890  of  the  St.  Louis,  Arkansas  and 
Texas.  Three  distinct  companies  were  formed  at  the  time :  the 
present  St.  Louis  Southwestern,  the  St.  Louis  Southwestern  Railway 
Company  of  Texas,  and  the  Tyler  and  Southeastern  Railway  Com- 
pany. In  1899  the  latter  road  was  absorbed  by  the  Texas  company, 
and  the  latter  exsts  as  a  separate  organization  merely  to  conform 
to  Texas  railway  laws.  The  purchase  of  several  small  lines  materi- 
ally increased  the  mileage  and  range  of  the  road,  bringing  the  total 
operated  mileage  in  1906  up  to  1,452  miles.  To  this  was  added,  in 
the  fall  of  1906,  the  Eastern  Texas  Railroad,  a  short  line  on  which 
originates  a  heavy  lumber  traffic. 

(639)  1 1 


640  ST.  LOUIS     SOUTHWESTERN 

Ownership. 

The  road  has  long  been  one  of  the  Gould  posessions,  but  its 
history  within  the  last  ten  years  has  been  one  of  steady  upbuilding 
and  extension,  with  no  increase  of  capital  stock,  and  a  minimum 
issue  of  new  securities. 

The  make  up  of  the  board  of  directors  is  rather  different  from 
that  of  the  other  Gould  roads,  including  Edwin  Gould,  president, 
and  Howard  Gould  ;  F.  H.  Britton,  vice-president  and  general  mana- 
ger, Winslow  S.  Pierce,  general  counsel,  E.  T.  Jeffrey,  president  of 
the  Denver  and  Rio  Grande,  R.  M.  Gallaway,  president  of  the, 
Merchants'  National  Bank,  New  York,  William  H.  Taylor,  first 
vice-president  of  the  Bowling  Green  Trust  Company  of  which 
Edwin  Gould  is  the  president ;  Murray  Carleton  and  Tom  Randolph, 
of  St.  Louis. 

The  make  up  of  the  board  of  the  St.  Louis  Southwestern  Rail- 
way Company  of  Texas  is  again  considerably  different  from  that  of 
the  St.  Louis  Southwestern,  although  it  is  merely  a  formal  organiza- 
tion. F.  H.  Britton  is  president  and  out  of  the  nine  directors,  five 
are  residents  of  Texas. 

Capitalization. 

The  capital  account  on  June  30th,  1906,  stood  as  follows: 

Common  stock $16,500,000 

Preferred  stock 20,000,000 

Income  bonds   (4% ) 3,260,500 

Total  stock $30,760,500 

Funded  debt  (Inc.  Income  bonds) 38,972.750 

Total    capital $78,733,250 

Securities  held 3,444,362 

Approx.  net  capital $75,288,888 

Approx.  net  capitalization  per  mile $51,910 

Average  miles  operated 1.452 

Net  earnings  on  total  capitalization 3.0% 

Stock  on  net  capitalization 50% 

Fixed  charges  on   net  income 76% 

Factor   of   Safety 24% 


ST.  LOUIS     SOUTHWESTERN  641 

Under  stock  has  been  included  $3,260,500  of  non-cumulative, 
4%  second  mortgage  income  bond  certificates,  the  remainder  of 
the  original  issue  of  these  bonds  having  been  exchanged  for  first 
consolidated  4%  mortgage.  These  bonds  have,  however,  no  voting 
rights. 

The  amount  paid  in  rentals  is  very  small  and  has  been  neglected 
in  the  preceding  estimate.  It  will  be  seen,  that,  as  is  character- 
istic of  the  Gould  roads  generally,  the  line  is  very  heavily  capitalized, 
the  average  per  mile  amounting  to  $51,910  on  a  road  with  net 
earnings  of  only  a  little  over  $6,000  per  mile.  This  heavy  capitaliza- 
tion is  further  reflected  in  the  fact  that  in  1906  the  net  earnings 
represented  only  3%  on  the  net  capitalization.  Half  of  this  capitali- 
zation, however,  is  represented  by  securities  on  which  no  dividends 
are  paid. 

Nevertheless,  even  in  the  prosperous  year  of  1906,  the  interest 
on  the  Fixed  Debt,  etc.  (not  including  income  bonds)  consumed  76% 
of  the  total  net  income,  leaving  a  Factor  of  Safety  for  the  underlying- 
securities  of  only  24%.  This,  for  a  road  of  the  character  of  the 
St.  Louis  Southwestern  is  very  low. 

The  chief  item  of  the  securities  held  is  $1,444,000  of  the  com- 
pany's own  bonds,  and  the  balance  is  mainly  made  up  of  small 
amounts  of  the  stocks  and  bonds  of  subsidiary  lines,  the  bridge 
company,  etc.     These  securities  represent  no  equities  of  value. 

The  capital  stock  has  not  been  increased  since  the  reorganization 
of  the  road,  and  in  five  years  the  funded  debt  increased  only  a  few 
millions,  while  the  gross  earnings  have  increased  nearly  25%.  This 
reflects  the  conservative  and  constructive  policy  which  characterises 
the  present  management  of  the  road. 

Character  of  Traffic. 

Farm  products  make  up  20%  of  the  tonnage,  of  which  cotton 
is  only  3%.  The  mine  products  are  small.  Lumber  is  heavy, 
this  with  forest  products  amounting  to  over  one  half  of  the  total 
tonnage.  Manufactures  and  miscellaneous  make  up  the  balance. 
An  even  two-thirds  of  the  traffic  of  the  road  originates  on  its 
own  lines.  The  revenue  from  passenger  business  amounts  to  less 
than  20%  of  the  gross  receipts. 

Stability  of  Earnings. 

The  following  table  shows  the  steady  growth  in  the  earnings 
of  the  mad,  with  no  very  great  increase  of  capitalization  : 

41 


642 


ST.  LOUIS     SOUTHWESTERN 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1896-7 

1,223 
1,223 
1,250 
1,258 
1,275 
1,293 
1,291 
1,303 
1,418 
1,452 

$4,743,546 
5,279,332 
5,862,338 
5,908,284 
7,387,174 
7,267,259 
7,278,574 
7,649,485 
8,860,231 
8,989,564 

$3,878 

I897-8 

4,316 

1898-9 

4,690 

1899-0 

4,695 

1900-1 

5,791 

1901-2 

5,620 

1902-3 

5,635 

1903-4 

5,868 

1904-5 

6,248 

1905-6 

6,192 

It  will  be  seen  that  the  earnings  per  mile  within  these  ten 
years  have  increased  66%,  while  the  mileage  has  increased  only 
about  15%.  This  increase  has  been  steady,  and  there  is  every  in- 
dication that  it  will  continue. 

In  the  ten  years  under  view  the  average  revenue  per  ton-mile 
has  declined  very  slightly.  It  was  1.13c.  in  1897  and  1.07c.  in  1905. 
For  the  year  of  1906  there  was  a  slight  drop,  to  .98c.  It  will  be 
seen  that  the  average  rate  is  high. 

Maintenance. 

From  the  following  table  it  will  be  seen  that  while  the  traffic 
density  has  increased  only  about  30%,  in  the  six  years  under  view, 
the  appropriations  for  maintenance  have  increased  nearly  50%. 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

367,571 
398,254 
388,865 
390,010 
432,980 
470,720 

$847 
1,050 
1,103 
1,073 
933 
1,136 

$527 
634 
641 
748 
679 
812 

$1,374 
1,684 
1,744 
1,821 
1,612 
1,948 

Average.  . . . 

408,066 

$1,023 

$674 

$1,697 

M.  K.  &T..  ..            495,226 
St.  L.  &  S.  F. .            448,625 
K.  C.  Sou                    837,406 
Atchison 577,005 

1,121 
S14 
961 

1,123 

616 

703 

1,156 

1,113 

1,737 
1,517 
2,117 
2,236 

Especially  for  1906,  these  maintenance  charges  were  undoubt- 
edly high,  and  reveal  the  policy  of  the  management  to  build  up 
the  road  as  far  as  possible  from  earnings.  Probably  in  the  mainten- 
ance of  way  alone  there  was  an  excess  charge  amounting  to  more 
than  $200,000  for  the  year. 

The  equipment  betterments  were  sufficient  to  allow  $2,040  per 
locomotive,  $635  per  passenger  car;  and  $50  per  freight  car.    This, 


ST.  LOUIS    SOUTHWESTERN  643 

on  a  road  of  the  traffic  density  of  the  St.  Louis  Southwestern  was 
liberal  and  undoubtedly  adequate. 

From  the  surplus  earnings  the  following-  appropriations  have 
been  made  within  five  years : 

1900-1  General    improvements $1,490,000 

Equipment    payments 258,825 

1901-2          "                  "           385,413 

1902-3  General   improvements 544,765 

These  amounts  are  small  and  have  been  superseded  in  later 
years  by  more  liberal  maintenance  charges. 

Surplus  Earnings. 

The  surplus  shown  after  Fixed  Charges  but  before  the  payment 
of  the  interest  on  the  income  bonds,  for  the  six  years,  has  been 
as  follows : 


Paid  on         Percent- 
Year  Surplus  J^idon        Earned  on 

Bonds  Preferred 


1900-1 '  $1,813,799  4  7 

1901-2 1,113,630  4  4.9 

1902-3 694,834  4  2.8 

1903-4 668,828  4  2.6 

1904-5 1,174,242  4  5.2 


Average 
Price 

(Calendar 
Year) 


33 
55 
67 
45 
43 


190.5-6 697,054 4 2^8 60 

Since  1901  the  deductions  for  the  interest  on  the  income  bonds 
has  amounted  to  only  about  $130,000  per  annum,  but  no  dividends 
have  been  paid  on  the  stock,  and  the  surplus  has  been  turned  back 
into  the  improvement  of  the  road. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906  there  were: 

Current  assets  and  supplies  on  hand $4,110,855 

Current  liabilities  (including  reserve  fund)      2.630.201 


Leaving  a   working  balance  of $1,480,654 

The  item  of  cash  was  $853,382  and  the  balance  to  the  credit 
of  Profit  and  Loss  was  $3,731,932. 

These  statements  were  for  the  entire  system. 


644  ST.  LOUIS     SOUTHWESTERN 

Investment  Value. 

In  his  report  to  the  president  in  1906,  Mr.  Britton,  the  vice- 
president  and  general  manager,  observes  that  "it  has  been  the 
policy  of  the  management  to  induce  and  assist  immigration  into 
the  territory  contributory  to  the  rails  of  the  company,  and  to  en- 
courage the  location  of  new  industries  along  the  line.  The  results 
of  this  policy  have  been  gratifying;  thousands  of  acres  of  wild 
lands  have  been  brought  into  cultivation  and  large  numbers  of  the 
better  class  of  farmers  from  the  older  states  have  located  alon^ 
the  line,  opening  up  and  developing  new  sections  which  have  here- 
tofore been  untouched.  This  has  been  especially  true  of  what  is 
known  as  Saint  Francis  basin  where  by  systematic  drainage,  thous- 
ands of  acres  of  land  have  been  reclaimed  and  cultivated.  The 
demand  for  lumber  also  increased  rapidly." 

It  is  evident  from  the  analysis  of  earnings  and  maintenance 
that  the  road  is  under  conservative  management,  and  that  its 
securities  have  been  steadily  growing  in  value.  The  small  items 
of  surplus  shown,  especially  in  1906,  are  the  result  of  the  liberal 
maintenance  and  it  would  not  have  been  difficult  for  the  manage- 
ment to  have  skimped  these  sums  in  order  to  pay  at  least  some 
dividends  on  the  preferred  stock. 

If  the  earnings  of  the  road  continue  to  increase  in  the  same 
favorable  fashion,  it  should  not  be  long  before  the  preferred  stock- 
is  receiving  a  dividend.  The  amount  of  this  stock  relative  to  the 
common  is  large,  and  the  full  5%  on  this  stock  would  consume 
$1,000,000  annually.  If  there  be  no  necessity  for  a  still  further  in- 
crease in  the  maintenance  charges,  and  earnings  keep  up.  at  least 
2%  might  be  paid  upon  this  stock  conservatively. 

Its  prices  have  reflected  this  possibility.  It  sold  as  low  as  §22 
per  share  in  1900,  and  under  the  favorable  showing  of  1902  it  was 
run  up  to  $80  per  share.  It  declined  to  $24  in  1903,  rising  again 
to  $66  in  1905.  The  average  price  in  1906  was  around  $55  per 
share. 

A  stock  with  these  figures,  and  the  possibilities  indicated,  does 
uol  present  a  particularly  attractive  investment.  (  >n  a  2'',  basis  it 
would  scarcely  be  worth  more  than  $50  per  share,  since  in  any 
event  it  is  limited  to  5%.  If,  however,  a  considerable  recession  in 
prices  should  come,  at  from  $30  to  $35  per  share  it  would  probably 
show  a  fair  return  to  the  investor  who  was  content  to  put  it  by  in 
his  strong  box. 


ST.  LOUIS     SOUTHWESTERN  645 

As  to  the  common  it  is  difficult  to  see  that  it  has  any  value  at 
the  present  time,  except  as  a  plaything-  for  the  stock  market.  It  sold 
down  helow  $10  per  share  in  1904,  declining-  to  that  from  $39  per 
share  in  1902.    It  rose  again  to  $27  in  1905. 

It  belongs  to  that  class  of  non-dividend  paying  stocks  which 
fluctuate  widely  in  value,  and  if  purchased  at  a  nominal  price,  like 
$10  or  $12  a  share,  is  likely  to  show  its  holders  a  handsome 
profit  on  the  investment,  when  the  market  turns  upward.  It  is 
probable  that  the  Gould  interests  hold  sufficient  quantity  of  the  stock 
so  that  control  of  the  road  could  not  be  picked  up  in  the  market, 
and  if  this  be  true,  the  stock  has  no  other  value  than  that  which 
would  be  justified  by  its  earnings  and  prospects. 


SEABOARD  AIR  LINE  RAILWAY. 

The  Seaboard  Air  Line  is  the  smallest  of  the  three  important 
railway  systems  which  practically  dominate  the  transportation  of  the 
eastern  southern  states.  It  operates  directly  a  total  of  about  2,600 
miles  extending  from  Richmond  and  Norfolk  on  the  north  through 
Savannah  to  Tampa  on  the  Gulf,  with  important  cross  lines  reach- 
ing from  Wilmington  on  the  coast  through  Atlanta  to  Birmingham 
and  Bessemer,  and  another  from  Savannah  through  Montgomery, 
Ala.  It  also  owns  the  Atlanta  and  Birmingham  Air  Line,  which, 
with  17  miles  of  trackage  rights,  operates  228  miles,  and  the  Florida 
West  Shore,  operating  69  miles;  and  in  1906,  it  acquired  control 
of  the  Macon,  Dublin  and  Savannah. 

The  present  company  was  organized  in  1900  as  successor  to  the 
Richmond,  Petersburg  and  Carolina  Railroad,  owning  a  line  from 
Richmond,  Va.,  to  Norlina,  N.  C,  and  representing  a  consolidation 
of  the  old  Seaboard  Air  Line  system  with  the  Georgia  and  Alabama, 
the  Florida  Central  and  Peninsular,  and  the  Atlantic,  Suwanee  and 
Gulf.  The  original  Seaboard  Air  Line  was  in  its  turn  a  consolida- 
tion of  the  old  Seaboard  and  Roanoke,  opened  in  1835,  and  re-buill 
in  1851,  with  several  smaller  roads.  The  Seaboard  practicalh 
parallels  the  Atlantic  Coast  Line  throughout  its  main  length,  an<l 
runs  through  a  rich  cotton  district  and  by  its  extensions  reaches  into 
the  manufacturing  districts  of  northern  Alabama. 

The  consolidation  was  carried  out  principally  by  John  L.  Wil- 
liams and  Sons,  of  Richmond,  Va.,  and  Middendorf,  Oliver  and  Co., 
of  Baltimore,  at  that  time  the  principal  owners  of  the  Georgia  and 
Alabama  railway.  Subsequent  to  this  the  Williams  interests  losl 
control  of  the  road,  and  considerable  changes  were  made  in  the 
directorate  and  management. 

In  1906  the  board  of  directors  consisted  of  Thomas  F.  Ryan. 
vice-president  of  the  Morton  Trust  Company  of  New  York,  also  a 
director  in  the  Hocking  Valley,  the  Pere  Marquette  and  several 
industrial  enterprises ;  James  A.  Blair,  of  Blair  and  Company,  bank- 
ers, New  York ;  H.  Rieman  Duval,  also  a  director  in  the  Atchison ; 
S.  Davies  Warfield,  of  Baltimore,  also  a  director  in  the  Missouri 

(646) 


SEABOARD  AIR  LINE  647 

Pacific ;  Y.  Van  den  Berg,  formerly  vice-president  of  the  Louisville 
and  Nashville,  now  associated  with  Ladenburg,  Thalmann  and  Co., 
bankers,  New  York;  Ernst  Thalmann,  of  the  same  firm;  Norman 
B.  Ream,  also  a  director  in  the  Baltimore  and  Ohio,  the  Erie  and 
other  roads;  H.  Clay  Pierce,  of  the  Waters-Pierce  Oil  Company, 
now  a  part  of  Standard  Oil ;  B.  F.  Yoakum,  chairman  of  the  board 
of  the  Rock  Island  system,  also  a  director  in  the  St.  Louis.  Mem- 
phis and  Southeastern,  which  meets  the  lines  of  the  Seaboard  at 
Birmingham:  T.  Jefferson  Coolidge,  Jr.;  C.  Sidney  Shepard.  of 
New  Haven ;  George  W.  Watts,  Durham,  N.  C. ;  James  H.  Dooley, 
Richmond,  Va.,  Townsend  Scott,  Baltimore;  and  N.  S.  Meldrum, 
New  York,  vice-president. 

The  executive  committee  of  1906  consisted  of  James  A.  Blair, 
Thomas  F.  Ryan,  S.  Davies  Warfield,  Thomas  Jefferson  Coolidge, 
Jr.,  B.  F.  Yoakum,  Ernst  Thalmann,  and  C.  E.  Shepard. 

In  a  circular  issued  in  1900  Messrs.  Williams  and  Sons  stated 
that  the  stock  was  distributed  among  1,100  stockholders  mainly  of 
southern  residence. 

The  larger  part  of  the  stock  of  the  Seaboard  has  been  acquired 
by  the  Seaboard  Company,  a  holding  organization  incorporated  in 
1905  to  provide  for  the  liquidation  of  the  floating  debt  of  the  rail- 
way, for  improvements,  extensions,  etc. 

Seaboard  Company. 

The  authorized  capital  of  the  holding  company  is  $36,000,000 
of  common  stock,  $18,000,000  each  of  first  and  second  preferred. 
At  the  close  of  1906  the  following  amounts  of  this  stock  had  been 
issued : 

Common   $28,545,755 

First   preferred 6,360,600 

Second   preferred 15,993,650 

At  the  close  of  1906  about  82^%  of  the  stock  of  the  railway 
company  had  been  exchanged  for  stock  of  the  holding  company,  the 
dissenting  stock  of  about  $10,000,000  par  value  being  held  by  a 
minority  interest  represented  by  Middendorf,  Oliver  &  Co.,  and 
John  L.  Williams  &  Sons.  The  basis  of  the  exchange  was  as 
follows : 

Each  holder  of  one  share  of  preferred  stock  of  the  railway 
company  upon  payment  of  $12.50  cash  received  $12.50  in  first  pre- 
ferred, $75  in  second  preferred  and  $12.50  in  common  stock. 


648  SEABOARD  AIR  LINE 

For  each  share  of  common  stuck  upon  payment  of  $12.50  cash, 
the  holder  received  $12.50  of  first  preferred  and  $87.50  in  common. 

Those  subscribing  to  the  new  stock  and  making  no  payment  in 
cash  received  $75  of  second  preferred  of  the  new  company  for 
each  share  of  the  old  preferred  and  holders  of  the  common  received 
$75  in  the  common  stock  of  the  new  company. 

Of  the  cash  capital  provided  by  the  formation  of  the  holding 
company  $4,440,900  up  to  June  30th,  1906,  had  been  loaned  to  the 
Railway  company  and  stood  upon  the  books  of  the  latter  as  notes 
payable. 

Capitalization. 

(Seaboard  Railway.) 

Excluding  the  small  amount  of  capital  stock  held  in  the  treas- 
ury, a  leasehold  interest  in  the  Wilmington  Railway  bridge,  carried 
at  $108,500,  and  the  $5,760,000  of  Seaboard  Air  Line  Atlanta-Bir- 
mingham first  mortgage  bonds  (against  which  an  equal  amount  of 
first  mortgage  bonds  of  the  Atlanta  &  Birmingham  Air  Line  bonds 
were  held  in  the  treasury),  the  capitalization  of  the  system  on  June 
30th,  1906,  stood  as  follows : 

Common    stock    (net) $37,009,000 

Preferred  stock  (net) 23,895,000 

Total    stock $60,904,000 

Funded    debt 57,840,000 

Equipment     trust 5,440,068 

Notes    4,440,900 

Total   capital $128,624,968 

Securities    held 4,724,687 

Approx.   net  capitalization $123,900,281 

Approx.  net  capital,  per  mile $47,453 

Average  miles   operated 2,61 1 

Net  earnings  on  net  capitalization 3.7% 

Stock  on  net  capitalization 49% 

Fixed  charges  on  total  net  income 78% 

Factor  of  safety 22% 

The  rentals  paid  by  the  Seaboard  were  small  and  about  bal- 
anced by  the  rentals  received.     The  amount  of  securities  held  was 


SEABOARD  AIR  LINE  649 

likewise  small  and  subtracted  but  little  from  the  gross  capitalization 
of  the  road. 

It  will  be  seen  that  for  a  road  earning-  less  than  $6,000  a  mile, 
the  capitalization  of  the  Seaboard  system,  like  that  of  the  Southern 
Railway,  is  high;  its  $47,453  per  mile  compares  with  $49,223  f( ti- 
the Southern  Railway;  with  $28,403  for  the  Atlantic  Coast,  and 
$39,684  for  the  Louisville  and  Nashville,  which  latter,  for  example, 
earns  $10,400  per  mile  gross. 

The  gross  earnings  of  the  Southern  Railway  in  1906  amounted 
to  $7,274  per  mile  as  against  $5,709  for  the  Seaboard,  showing 
that  the  capitalization  of  the  Seaboard,  as  compared  with  gross 
earnings,  is  higher  even  than  that  of  the  Southern.  This  fact  is 
further  evidenced  by  the  comparison  of  the  net  earnings  with  the 
net  capitalization,  the  net  earnings  of  the  Seaboard  showing  in  1906 
3.7%,  as  compared  with  4.2%  for  the  Southern  Railway,  7.1% 
for  the  Atlantic  Coast,  and  8.9%  for  the  Louisville  and  Nashville. 

The  capitalization  of  the  Seaboard,  like  the  Southern,  is,  earn- 
ings compared,  at  least  twice  as  high  as  that  of  standard  western 
roads,  like  the  St.  Paul,  the  Burlington,  and  the  North  Western. 
These  latter  roads,  with  higher  gross  earnings,  are  capitalized  at  an 
average  of  about  $30,000  per  mile. 

It  will  be  seen  from  the  table  given  above  that  the  stock  of  the 
road  represents  one-half  of  the  net  capitalization  and  on  this  stock 
no  dividends  are  being  paid. 

The  bonded  debt  of  the  road  as  compared  with  its  earnings  is 
high;  and  Fixed  Charges  in  the  prosperous  year  of  1906  consumed 
78%  of  the  total  net  income,  leaving  a  Factor  of  Safety  for  the 
underlying  securities  of  only  22%.  This  is  very  low  and  compares 
with  a  similar  factor  of  safety  of  from  50%  to  60%  on  such  roads 
as  the  Pennsylvania,  the  Baltimore  and  Ohio  and  other  standard 
lines.  This  is  one  of  the  handicaps  which  militate  greatly  against 
the  development  of  the  road. 

Equities  Owned. 

The  Seaboard  Air  Line  has  a  one-sixth  interest  in  the  joint 
Richmond-Washington  Company,  and  has  a  traffic  arrangement 
with  the  Pennsylvania  by  which  it  maintains  through  car  service 
to  the  South.  It  also  owns  the  Baltimore  Steam  Packet  Company, 
unbonded,  and  has  a  substantial  interest  in  the  Old  Dominion  Steam- 
ship Company.  The  surplus  earnings  of  the  water  lines  in  1906 
were  $139,457.  j  I 


650 


SEABOARD  AIR  LINE 


As  of  June  30th,  1906,  the  Seaboard  held  in  its  treasury  $5,- 
760,000  first  mortgage  bonds  of  the  Atlanta  and  Birmingham  Rail- 
way Company,  held  as  security  for  an  equal  amount  ot  bonds  issued 
by  the  Seaboard.  This  amount  was  devoted  to  the  construction  of 
the  Atlanta  and  Birmingham  line. 

In  addition  to  the  bonds  so  issued  on  the  same  date  there  was 
due  to  the  Seaboard  as  advances  to  the  Atlanta  and  Birmingham 
line,  $4,063,830,  partly  secured  by  second  mortgage. 

The  Atlanta  and  Birmingham  in  1906  barely  paid  its  operating 
expenses  and  taxes,  so  that  the  $230,416  interest  on  the  first  mort- 
gage bonds  had  to  be  met  by  the  Seaboard,  but  this  amount  was  not 
charged  to  Seaboard  income  but  carried  in  open  account  with  the 
Atlanta  and  Birmingham  line  as  additional  indebtedness.  The  Sea- 
hoard  also  guarantees  the  principal  and  interest  of  the  Florida  and 
\\  est  Shore,  which  showed  a  deficit  for  the  year  over  all  charges  of 
$9,500,  which  brought  up  the  amount  due  to  the  Seaboard  to 
$84,286. 

Altogether  the  amount  of  outside  holdings  of  the  company  is 
small,  and  its  equities  in  any  of  these  holdings  would  add  but  little 
to  the  income  of  the  road. 


Increase  of  Capitalization. 

From  the  close  of  the  first  full  year  of  the  consolidated  com- 
pany's operations  to  1906  the  increase  of  capitalization  and  earn 
ings  was  as  follows: 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt 

Total 

Gross 
Earnings 

1901..  . 
1 906. .  . 

$29,000,000 
37,009,000 

$19,400,000 
23,895,000 

$54,948,912 
67,720,968 

$102,989,912 
128,624,968 

$10,426,279 
15,116,947 

Increase  over  5  years :  Total  capital,  25%  ;  gross  earnings,  45%. 

Tt  will  be  seen  that  by  adding  one-quarter  of  its  total  capital 
obligations,  the  road  was  able  to  increase  its  gross  earnings  by 
nearly  one-half.  This  is  an  admirable  showing  and  had  the  road 
been  less  heavily  handicapped  with  debt  at  the  beginning,  it  would 
now  be  in  excellent  shape. 

In  January,  1907,  a  new  issue  was  authorized  of  $18,000,000 
of  30-year  5%  bonds  to  be  secured  by  a  mortgage  and  collateral 
trust  agreements  covering  (subject  to  existing  liens)  all  the  rail- 
way property  and  such  securities  as  may  be  deemed  advisable.     Of 


SEABOARD  ATR  LINE 


651 


these  bunds  $7,308,000  were  offered  to  the  stockholders  pro  rata  at 

90,  to  provide  for  debt  incurred  for  improvements  and  extensions. 

In  May  of  1907,  $1,300,000  equipment  trust  notes  were  sold. 

Character  of  Traffic. 

'  Products  of  agriculture  made  up  15%  of  the  total  tonnage  for 
1906,  of  which  cotton  contributed  Zl/2%,  products  of  mines  13%, 
forest  products  35%,  and  manufactures  and  miscellaneous  35%. 
The  largest  single  item  in  the  traffic  of  the  road  was  lumber  and 
staves  which  amounted  to  23%,  or  nearly  one-quarter.  Passenger 
earnings  contributed  21%  of  the  gross  earnings  of  the  road. 

Stability  of  Earnings. 

The  following  figures  taken  from  Mr.  Mundy's  "Earning 
Power  of  Railroads,"  show  the  mileage  and  earnings  of  the  system 
both  prior  to  its  consolidation  and  subsequently.  Previous  to  Jul}' 
1st,  1900,  the  Seaboard  Air  Line  comprised  961  miles,  the  Florida 
Central  and  Peninsular  940  miles,  and  the  Georgia  and  Alabama 
458  miles. 


Year 


1895  . . 

1896  . . 

1897  . . 

1898  .  . 

1899  .  . 

1900  .  . 
1900-1 
1901-2. 
1902-3. 
1903-4 
1904-5 
1905-6. 


Miles  Operated 

Gross  Earnings 

Per  Mile 

2,185 

%  5,585,832 

$2,566 

2,225 

6,034,083 

2,712 

2,293 

6,901,286 

3,009 

2,349 

7,458,274 

3,175 

2,359 

8,559,532 

3,628 

2,359 

8,980,322 

3,806 

2,592 

10,426,279 

4,022 

2,604 

11,068,478 

4,250 

2,607 

12,156,928 

4,663 

2,611 

12,750,271 

4,883 

2,611 

13,619,274 

5,216 

2,611 

15,116,947 

5,790 

It  will  be  seen  from  the  above  that  in  the  six  years  prior  to  the 
consolidation,  earnings  per  mile  had  increased  from  $2,566  to 
$3,806,  or  more  than  50%.  From  the  first  year  of  the  consolidation 
(1901)  the  earnings  increased  from  $4,022  per  mile  to  $5,790  per 
mile  in  1906,  an  increase  of  42%  in  five  years.  The  increase  in 
mileage  earnings  then,  since  the  consolidation,  was  slightly  less 
rapid  than  previously.  The  increase  in  mileage  earnings  for  the 
twelve  years  under  view  was  over  $3,200  per  mile  or  about  125%. 
This  is  an  average  increase  of  10%  per  year. 

It  is  to  be  noted  that  the  average  rate  per  ton  per  mile  received 
by  the  Seaboard  is  high,  amounting  in  1905  to  1.18c.  and  in  1906 


652 


SEABOARD  ATR  TJNE 


to  1.12c,  which  compares  with  1.13c.  for  the  Atlantic  Coast  Line, 
.93c.  for  the  Southern,  and  .47c.  for  the  Norfolk  and  Western.  This 
is  due  in  part  to  the  character  of  the  freight  carried  and  in  part  to 
the  fact  that  in  its  special  territory  the  Seaboard  has  little  compe- 
tition. 

Maintenance. 

The  traffic  density  and  maintenance  items  for  the  six  years  of 
the  operations  of  the  consolidated  company  were  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

236,465 
284,285 
296,061 
296,630 
311,586 
368,269 

$538 
492 
569 
642 
693 
714 

$476 
418 
556 
676 
663 
746 

$1,014 
900 
1,125 
1,318 
1,356 
1,460 

Average.  . . . 

311,366 

$620 

$611 

$1,231 

Atl.  Coast .... 

So.  Ry 

L.  &  N 

Cent,  of  Ga . . . 

259,769 
435,987 
929,594 
303,245 

709 

860 

1,490 

890 

556 

964 

1,537 

722 

1,265 
1,842 
3,027 
1,612 

It  will  be  seen  that  in  the  period  under  view  traffic  density  in- 
creased about  50%  and  the  average  maintenance  of  way  per  mile 
about  35%.  The  increase  of  equipment  maintenance  was  heavier, 
rising  from  $476  per  mile  in  1901  to  $746  in  1906,  an  increase  of 
about  60%.  The  increase  of  total  maintenance  per  mile  was 
about  40%  or  about  the  same  as  the  increase  of  traffic  density,  so 
that  the  road  should  have  been  rather  better  maintained  in  1906 
than  in  1901.  Compared  with  the  Southern  Railway  it  will  be  seen 
that  with  an  average  traffic  density  for  the  six  years  one-quarter 
less  than  that  of  the  Southern,  the  average  expenditures  for  mainte- 
nance of  all  sorts  were  one-third  less.  Compared  with  the  Atlantic 
Coast  Line,  the  average  maintenance  for  six  years  was  slightly  less, 
on  a  somewhat  higher  average  density. 

Tt  seems  fairly  obvious  from  the  above  comparisons  that  no 
earnings  were  concealed  in  maintenance. 

Surplus  Earnings. 

The  nominal  surplus  shown  after  all  charges  since  the  consoli- 
dation were  as  follows: 


SEABOARD  AIR  LINE 


653 


Year 


Per  cent 
Earned  on 
Preferred 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


5    329,659 

820,254 

832,481 

382,825 

1,171,908 

1,131,578 


It  is  to  be  noted  that  the  surplus  shown  in  1906  did  not  include 
the  loss  from  the  operations  of  the  Atlanta  and  Birmingham  line  nor 
of  the  Florida  and  West  Shore.  The  combined  loss  on  these  two 
roads  for  the  year  was  $238,953.  Deducting  this  amount  from  the 
nominal  surplus  shown  left  an  actual  surplus  for  the  year  of  only 
$892,624.  This,  after  an  increase  during  the  year  of  more  than 
10%  in  the  gross  earnings  was  a  disappointing  showing,  and  refer- 
ence to  the  table  of  maintenance  charges  will  show  that  it  was  not 
due  to  a  heavy  increase  in  these  items. 

Operating  expenses  for  the  year  rose  from  66.7%  in  1905  to 
69.5%  in  1906.  Of  the  $1,421,000  added  operating  expenses  for 
the  year,  $1,127,000  was  due  to  an  increased  cost  of  transportation. 
This  resulted  from  an  increase  in  wages,  in  the  cost  of  fuel,  and  loss 
by  wreckage.  The  amounts  paid  for  car  mileage,  which  may  be 
assumed  to  be  the  rent  of  foreign  equipment,  was  high,  and  higher 
even  than  the  previous  year,  amounting  to  $253,313  in  1906,  and 
this  was  in  the  face  of  the  receipt  of  1,100  new  cars  of  large  ca- 
pacity during  the  year. 

The  operations  of  the  Birmingham  and  Alabama  line  were 
rather  astonishing.  The  gross  earnings  for  1906  amounted  to 
$836,533,  or  average  earnings  of  $3,230  per  mile.  The  operating- 
expenses  for  the  year,  taxes  and  rentals  included,  were  100%.  No 
explanation  for  this  curious  result  is  given  by  the  report.  Had  the 
Birmingham  line  been  operated  on  the  same  basis  as  the  rest  of  the 
system,  about  70%,  it  would  have  shown  a  surplus  of  about  $250,- 
000,  or  sufficient  to  pay  the  full  interest  on  its  first  mortgage  bonds 
and  relieve  the  company  of  the  deficit  of  the  same  sum  which  was 
shown  for  the  year.  This  was  an  item  on  which  the  stockholders 
of  the  road  would  doubtless  have  enjoyed  more  light. 

The  Balance  Sheet. 

In  the  balance  sheet  at  the  close  of  the  fiscal  year  of  July  30, 
1906,  there  was  an  item  of  notes  receivable  to  the  amount  of  $1,075,- 


654  SEABOARD  AIR  LINE 

996.  Similarly  there  were  in  the  items  of  current  liabilities  notes  pay- 
able to  the  amount  of  $4,409,900,  which  latter  amount  has  alreath 
been  included  in  the  capital  indebtedness  of  the  road.  Including  the 
notes  payable  in  the  current  assets,  but  excluding-  the  same  item 
from  the  current  liabilities, 

Current  assets   showed $3,992,342 

and  Current  liabilities 3,735,436 

leaving  an  apparent  working  balance  of $256,906 

The  repcrt  further  shows  items  of  "Provisional  Accounts"  (lia- 
bilities) to  the  amount  of  $3,612,150  additional.  The  larger  part 
of  this  was  the  amount  due  to  proprietary  companies  of  $2,171,442 
Against  these  items  were  deferred  assets  amounting  to  $4,609,788, 
of  which  the  larger  part  was  $4,063,830  advanced  to  the  Atlanta 
and  Birmingham  Air  Line. 

Should  the  operations  of  the  Birmingham  line  be  successful, 
and  it  ought  to  be  able  to  earn  not  only  the  interest  on  its  first 
mortgage  bonds,  but  its  debt  to  the  Seaboard  Air  Line  likewise,  the 
liabilities  of  the  company  would  not  appear  so  formidable.  But  all 
this  complicated  arrangement  of  accounts  was  offered  to  the  share- 
holders without  a  word  of  explanation  of  any  sort. 

The  various  items  of  cash  amounted  to  $1,604,117.  The  work- 
ing balance  shown  even  under  the  favorable  arrangement  given 
above  was  very  small,  and  so  far  as  the  report  indicates,  the  com- 
pany did  not  seem  very  well  situated  for  the  conduct  of  its  current 
affairs. 

Investment  Value. 

The  affairs  of  the  Seaboard  in  1907  were  in  such  complicated 
shape,  and  the  amount  of  information  supplied  by  its  reports  and 
otherwise,  so  limited  as  to  make  it  scarcely  worth  while  to  attempt 
to  estimate  the  value  of  its  securities. 

For  the  first  nine  months  of  the  fiscal  year  of  1906-7  gross 
earnings  showed  an  increase  of  a  little  over  8%,  but  operating  ex- 
penses were  so  heavy  that  the  net  had  declined  by  more  than  $1,- 
000.000  from  the  previous  year.  At  the  same  time  fixed  char  es 
had  considerably  increased,  so  lhat  in  lieu  of  a  surplus  of  nearly 
$1,000,000  shown  during  the  same  period  of  the  previous  year,  ihe 
operations  of  the  company  showed  a  deficit  of  nearly  $350,000.  The 
same  heavy  rise  in  operating  expenses  had  been  shown  by  I  he 
Southern  Railway,  and  in  a  lesser  degree  by  the  Atlantic  Coast  Line. 


SEABOARD  AIR  LINE  655 

It  was  evident  from  the  above  that  unless  a  radical  change  took 
place  the  company  would  be  forced  to  a  reorganization,  in  which 
case  the  outstanding  stock  of  the  railway  would  be  of  little  value. 
In  circulars  issued  by  John  Skelton  Williams  of  Richmond  it  was 
charged  that  the  road  had  been  "shamefully  mismanaged''  and  that 
it  was  the  purpose  of  the  Blair-Ryan  management  to  freeze  out  the 
minority  holders. 

Seaboard  Company. 

The  first  preferred  stock  of  the  Seaboard  Company  is  entitled 
to  5%  dividends,  and  is  preferred  both  as  to  principal  and  dividends, 
and  after  July  1st,  1910,  the  dividend  is  cumulative,  but  the  stock 
is  redeemable  at  the  option  of  the  company  after  July  1st,  1908,  ano 
is  convertible  at  the  option  of  the  holder  into  second  preferred  stock 
at  par. 

The  second  preferred  is  entitled  to  6%  non-cumulative  divi- 
dends and  is  redeemable  at  the  option  of  the  company  at  110  aftc 
July  1st,  1908,  providing  the  first  preferred  shall  have  been  redeemed 
or  converted. 

All  classes  of  stock  have  full  voting  power. 

On  the  outstanding  preferred  stock,  $6,360,600,  2}i%  dividends 
were  paid  in  July,  1906,  and  in  January,  1907. 

It  will  be  seen  from  the  above  that  as  the  railway  company 
earned  a  deficit  for  the  fiscal  year  of  1906-7,  the  only  income  de- 
rivable by  the  holding  company  was  from  interest  on  bonds  and 
loans,  and  that  the  earnings  of  the  railway  were  insufficient  to  meet 
these  charges  in  full. 


SOUTHERN  PACIFIC  COMPANY. 

The  Southern  Pacific  Company  operates  the  longest  line  of 
rails  covered  by  any  single  company  in  the  world,  though  the 
difference  between  it  and  the  Atchison  or  Canadian  Pacific  is  not 
great,  and  its  gross  income  is  second  only  to  that  of  the  Penn- 
sylvania. This  income  for  1906,  including  receipts  from  the  land 
department,  exceeded  $110,000,000.  Nevertheless,  it  is  to  all  in- 
tents a  subsidiary  part  of  the  Union  Pacific-Southern  Pacific  sys- 
tem. This  is  true,  not  merely  with  regard  to  the  Union  Pacific's 
ownership  of  what  amounts  to  practical  control,  but  as  to  actual 
management.  Its  chief  operating  officers  are  the  same  as  those 
of  the  Union  Pacific,  and  in  two  of  the  sectional  divisions  into 
which  the  combined  system  is  divided  for  operating  purposes, 
parts  of  both  the  two  companies'  rails  are  included.  In  other 
words,  for  operating  purposes  the  two  companies  are  practically 
a  unit. 

The  lines  of  the  company  extend  from  San  Francisco  north- 
ward to  Portland,  in  Oregon,  eastward  to  Ogden,  in  Utah,  and 
southward  through  Southern  California,  Arizona,  New  Mexico 
and  Texas  to  New  Orleans.  In  1906  the  system  embraced  an 
average  of  9,191  miles. 

In  addition  to  this,  the  Southern  Pacific  operates  an  import- 
ant line  of  steamships  from  the  Gulf  of  Mexico  up  the  Atlantic 
coast,  and  owns  a  majority  interest  in  the  Pacific  Mail  Steamship 
Company,  operating  between  San  Francisco,  Panama  and  the 
Orient.  The  company  has  also  considerable  interest  in  the  Cali- 
fornian  oil  fields  and  electric  roads  in  that  State. 

The  Southern  Pacific  Co.  owns  no  track  in  fee,  but  partly 
through  leases,  partly  through  ownership  of  stock,  controls  the 
great  system  of  rail  and  steamship  lines,  whose  earnings  are  in- 
cluded in  its  report. 

History. 

The  beginning  of  the  present  Southern  Pacific  was  the 
Central  Pacific,  and  (he  collateral  Western  Pacific,  chartered  by 

(656) 


SOUTHERN  PACIFIC  657 

act  of  Congress  in  1862,  simultaneously  with  the  Union  Pacific. 
The  Western  Pacific  was  to  build  from  Oakland,  opposite  San 
Francisco  to  Sacramento,  and  the  Central  Pacific  eastward  from 
there  to  join  the  lines  of  the  Union  Pacific  wherever  they  should 
meet. 

It  is  said  that  the  builders  of  the  Central  Pacific,  Messrs. 
Crocker,  Huntington  and  Stanford,  began  with  less  Ithan  a 
quarter  of  a  million  capital  between  them  upon  a  work  whose 
estimated  cost  was  $58,000,000.  They  obtained  loans  from  Sacra- 
mento and  Placer  counties  in  California,  and  with  this  built 
enough  road  to  begin  to  draw  on  the  heavy  subsidies  offered  by 
the  National  Government,  which  were  the  same  as  those  of  the 
Union  Pacific.  Shortly  after,  the  Central  and  Western  Pacific 
were  amalgamated  and  several  smaller  lines  radiating  from  San 
Francisco  were  later  absorbed.  It  then  leased  the  Southern 
Pacific  with  1,229  miles  of  track  and  thus  gained  control  of 
practically  the  entire  transportation  system  of  California.  From 
1873  to  1883  the  Central  Pacific  was  prosperous  and  for  a  time 
paid  good  dividends.  In  1884,  however,  the  Southern  Pacific 
Company  was  formed  as  a  Kentucky  corporation,  taking  over  by 
lease  the  Southern  Pacific,  the  Central  Pacific  and  their  subsidi- 
ary lines.  By  this  means  the  road  escaped  the  direct  control  of 
California  law  and  likewise  enabled  its  ingenious  inventors,  so  it 
was  charged,  to  transfer  the  profits  of  the  Central  Pacific  to  the 
new  Southern  Pacific ;  that  is  to  say,  to  themselves. 

The  road  eventually  came  under  practically  the  single  domi- 
nation of  Mr.  Huntington,  who  designed  it  to  form  a  part,  with 
the  Chesapeake  &  Ohio  and  intermediary  lines,  of  a  complete  trans- 
continental system  and  for  a  time  it  was  so  operated.  This  was 
the  first  true  transcontinental  road  in  the  United  States. 

In  1901  Mr.  Huntington  died,  and  his  and  allied  interests 
in  the  road  were  sold  to  the  Union  Pacific  under  Mr.  Harriman's 
domination,  and  since  that  time  it  has  been  a  Harriman  road. 

The  absorption  in  1898  of  the  Houston  &  Texas  Central  and 
allied  lines  gave  the  road  a  large  mileage  in  Texas  and  made  it 
the  most  important  single  road  in  that  State. 

The  Southern  Pacific  Company  was  at  the  time  of  its 
organization  enormously  over-capitalized,  but  large  sums  have 
been  taken  annually  from  its  earnings  for  improvements,  both 
before  the  Harriman  regime  and  especially  since,  so  that  the 
Company    has    gradually    "grown    up"    to    its    capitalization,    and 

42 


658  SOUTHERN  PACIFIC 

its  net  earnings  now  represent  a  very  respectable  percentage  on 
the  total  of  stocks  and  bonds.  No  dividends  were  ever  paid  on 
the  common  stock  until  1906. 

Ownership. 

As  of  June  30th,  1906,  the  Union  Pacific  owned  $90,000,000 
par  value  out  of  about  $198,000,000  of  the  common  stock,  and 
$'18,000,000  par  value  out  of  about  $39,000,000,  par  value  of  the 
preferred.  While  this  $108,000,000  of  Union  Pacific  stock  does 
not  represent  a  majority  interest,  it  amounts  practically  to  that, 
and  it  is  not  improbable  that  interests  friendly  to  the  Union 
Pacific  own  more  than  enough  to  make  the  control  absolute. 

The  number  of  shareholders  is  comparatively  small,  the  road 
reporting  only  2,424  stockholders  in  1905,  as  against  17,523  for 
the  Atchison  and  14,256  for  the  Union  Pacific. 

The  directorate  of  1906  included  E.  H.  Harriman,  president ; 
Wm.  D.  Cornish,  vice-president;  Robert  S.  Lovett,  James  Stillman, 
David  Willcox,  president  of  the  Delaware  &  Hudson ;  Marvin 
Hughitt,  president  of  the  North  Western,  all  directors  in  the  Union 
Pacific;  Maxwell  Evarts,  attorney  of  both  roads,  and  W.  V.  S. 
Thorne,  director  of  purchases,  both  directors  in  the  Oregon 
Shortline ;  A.  K.  Van  Deventer,  assistant  treasurer,  and  Henry 
W.  De  Forest,  closely  associated  with  Mr.  Harriman.  These 
make  up  a  considerable  majority  of  the  board.  The  other  direc- 
tors were  Robert  Goelet,  of  Newport,  R.  I. ;  H.  E.  Huntington, 
very  largely  interested  in  local  traction  matters  in  Southern 
California;  Clarence  H.  Mackay,  of  New  York,  the  head  of  the 
Mackay  Companies,  the  Postal  Telegraph,  etc.;  D.  O.  Mills 
and  Ogden  Mills,  New  York. 

The  executive  committee  of  1906  was  made  up  of  Messrs. 
Harriman,  De  Forest,  Stillman,  Lovett  and  Willcox;  three  of 
these  are  also  members  of  the  executive  committee  of  the  Union 
Pacific. 

The  affiliations  of  the  Southern  Pacific  are  naturally  those 
of  the  Harriman  interests. 

Capitalization. 

The  Southern  Pacific  Company,  whose  shares  are  dealt  in  on 
the  exchanges,  is  a  holding  company — a  Kentucky  corporation 
which  owns  the  entire  capital  stock  of  the  Southern  Pacific, 
Central    Pacific  and   the   numerous  other   roads,  all   grouped   to- 


SOUTHERN  PACIFIC  659 

gether    as    the    "Proprietary    Companies."      The    capitalization    of 
the  consolidated  system,  June  30,  1906,  stood  as  follows : 

Common   stock $197,849,258 

Preferred    stock 39,569,840 

Total    stock $237,419,098 

Funded  Debt   (net) 354,737,321 

Total   capital $592,156,419 

Approximate  capital  per  mile $64,426 

Average  miles  operated 9,191 

Net  earnings  on  total  capital 6.6% 

Stock  on  total  capitalization 40% 

Fixed  charges  on  total  net  income 49% 

Factor  of  safety 51  % 

The  funded  debt  shown  above  is  the  total  amount  of  the 
outstanding  securities  of  the  system,  less  the  amount  held  in  sink- 
ing funds,  $13,936,000,  and  about  two  and  one-half  millions  dol- 
lars of  stocks  and  bonds  held  in  the  treasury.  This  amount 
includes  the  item  of  $17,643,814,  the  balance  of  the  notes  issued 
to  the  United  States  Government,  in  settlement  of  the  Central 
Pacific's  indebtedness.  The  item  of  securities  held  is  passed  by, 
owing  to  the  difficulty  of  determining  the  value  of  the  securities 
held.  This  item  is  further  discussed  unddr  jthe  subject  of 
"Equities  Owned."  It  might  reduce  the  gross  capitalization  of 
the  company  by  a  matter  of  $25,000,000,  more  or  less,  that  is  to 
say,  not  much  to  exceed  5%-.  It  follows  that  the  figures  as  to 
capitalization  per  mile  is  the  gross  capitalization,  but  this  would 
not  differ  very  greatly  from  the  amount  if  the  value  of  outside 
securities  had  been  deducted. 

The  figure  of  $64,426,  gross  capital  per  mile,  compares  with 
a  similar  estimate  of  $58,887,  net  capital  for  the  Atchison  ;  $59,512 
net  capital  for  the  Northern  Pacific;  $42,362  for  the  Croat  North- 
ern, and  $28,613  for  the  Canadian  Pacific.  Reference  to  the 
analysis  will  show  that  the  nominal  net  capital  per  mile  of  the 
Union  Pacific  is  $73,992.  But  if  the  market  value  of  its  securi 
ties  be  deducted,  its  nel  capitalization  would  actually  be  not  much 
above  $50,000  per  mile. 

On  tli e  basis  of  its  earnings  in  1906  the  capitalization  of  the 


660  SOUTHERN  PACIFIC 

Southern  Pacific  compares  favorably  with  that  of  the  Atchison, 
its  showing  of  6.6%  net  earnings  on  total  capital  standing  against 
5.9%  net  earnings  on  total  capital  for  the  Atchison.  Both  these 
figures,  however,  are  very  much  below  that  of  the  other  Pacific 
companies,  that  of  the  Union  Pacific  being  nominally  8.0%,  the 
Northern  Pacific  9.6%  the  Great  Northern  10.1%,  Canadian  Pacific 
9.4%. 

The  larger  part  of  the  capitalization  is  in  the  form  of  bonds, 
stock  representing  only  40%  of  the  total. 

On  the  other  hand,  in  1906  fixed  charges  consumed  only 
half  the  nominal  total  net  income  factually  not  over  40%),  leav- 
ing an  ample  margin  of  safety  for  its  underlying  securities. 

Equities  Owned. 

Unlike  the  Union  Pacific,  the  Southern  Pacific  is  not  a  large 
holding  corporation,  in  the  sense  of  holding  large  amounts  of 
outstanding  securities.  Outside  of  the  stocks  and  bonds  of  its 
"Proprietary  Companies,"  that  is,  companies  included  in  the 
operations  of  the  system,  it  owns  a  total  of  $63,483,243,  face  value 
of  the  capital  stocks  of  other  companies,  and  $5,228,300  of  out- 
side bonds.  The  amount  at  which  these  outside  holdings  are 
carried  on  the  books  of  the  Company  is  not  separately  stated.  The 
chief  items  are : 

Pacific  Mail  Steamship  Company.  $10,010,000  (a  bare  ma- 
jority in  the  capital  stock). 

Pacific  Electric  Ry  Co.,  $10,000,000  (par  value,  constituting 
an  even  half  interest). 

San  Francisco  &  No.  Pacific  PR.  Co.,  $5,500,000  (  par  value, 
very  closely  the  entire  amount  outstanding). 

'  North    Shore   RR.   Co..   $5.()80,400    (practically     the     entire 
issue). 

Mexican  International,  $4,172,100  (a  small  minority). 
Stocks  of  Oil  Companies,  $17,008,436  (value  not  indicated). 
In  1906  the  Southern  Pacific  received  in  dividends  from 
these  stocks  $372,668,  but  this  would  probably  not  indicate  in 
any  way  the  market  value  of  these  securities.  For  example,  the 
Pacific  Mail  pays  no  dividends,  but  control  of  this  large  steam- 
ship company  is  undoubtedly  of  great  valm-  to  the  Southern  Pa- 
cific RR.  Most  of  the  other  securities,  aside  from  the  stocks 
of  the  oil  companies  and  electric  railways,  are  stocks  of  small 
roads  which   will  eventually  be  merged  into  the  system. 


S<  >UTITl«;RN   PACIFIC 


661 


In  addition  to  the  above,  the  Southern  Pacific,  or  ils  constitu- 
ent companies,  had  in  1906  a  total  oi  15.000,000  acres  of  unsold 
land.  On  the  lands  sold  during  the  year  the  price  averaged 
was  $2.73  per  acre.  1 1  would  be  difficult  to  give  a  general  valua- 
tion to  this  asset,  but  on  the  basis  of  the  average  price  of  1906 
it  might  readily  exceed  $25,000,000  or  $30,000,000. 

Increase  of  Capitalisation. 

In  the  six  years  from  1900  the  capitalization  of  the  system 
was  not  greatly  increased,  the  amount  of  common  stock  remain- 
ing practically  the  same.  The  principal  items  of  .increase,  as  will 
he  seen  from  the  following  table,  were  the  issue  of  a  little 
less  than  $40,000,000  of  the  authorized  $100,000,000  of  7%  pre- 
ferred stock,  redeemable  at  115,  and  about  $50,000,000  in  new 
bonds. 

If  the  proportion  of  this  increase  which  went  to  the  purchase 
of  outside  securities,  including  Pacific  Mail,  be  deducted,  the 
actual  increase  of  capitalization  of  the  system  in  six  years  was 
considerably  under  15%,  while  at  the  same  time  the  gross  earn- 
ings (rail  lines  only)  increased  50%. 

This  is  largely  due  to  the  fact  that  the  road  paid  no  dividends 
until  1906  and  that  all  its  surplus  was  turned  back  into  improve- 
ments of  the  property. 


Year 
1 

Common 
Stock 

r 

Preferred 
Stock 

Funded  Debt         Total 
(Net)               Capital 

Gross 

Earnings 

(Rail  lines) 

1900.  .  . 

$197,832,148 
197,849,258 

$305,376,417 
354,737,321 

$503,408,665 
592,156,419 

$65,279,622 
99,123,549 

1906. . . 

39,569,840 

Increase  over  six  years:  Total  capital,  18%;  gross  earn- 
ings, 50%. 

In  1907  the  amount  of  preferred  stock  was  increased  to  $75,- 
569,840  through  the  issue  of  about  $36,000,000  new  stock. 

Character  of  Traffic. 

Unlike  the  Cnion  Pacific,  the  Southern  Pacific  carefully  item- 
izes its  traffic.  In  1906,  farm  products  contributed  22%,  mine  prod- 
ucts 27%,  forest  products  21%,  merchandise  and  manufactures 
30%.  It  is  easy  to  see  that  with  9,000  miles  of  track  distributed 
all  the  way  from  Texas  to  the  Columbia  River,  and  the  Central 
Pacific  line  striking  eastward  from  Ogden,  considering  also  its 
water  lines,  that  its  traffic  would  be  exceedingly  diversified. 


662 


SOUTHERN  PACIFIC 


Passenger  earnings  are  high,  amounting  to  over  25%  of  the 
gross  earnings. 

Stability   of   Earnings. 

In  ten  years  the  operated  mileage  of  the  Southern  Pacific 
has  increased  nearly  _\(X)()  miles,  while  in  the  meantime  the  gross 
earnings  have  more  than  doubled.  The  effect  of  this,  as  will 
be  seen,  was  to  increase  the  mileage  earnings  by  more  than  half. 


Year 

Miles  Operated 

Gross  Earnings 
Rail  Lines 

Per  Mile 

1896-7 

1897-8 

7,358                       $46,578,034                $6,330 
7,372                           53,424,913                   7.247 

1898-9. . 

7,843                          57,497,155 
8,215                          65,279,622 
8,655                            73.163.558 

7,331 

1899-0 

7,946 

1900-1 

8,453 

1901-2 

8,757 
8,842 
9,025 
9,138 
9,191 

78,923,723 
82,925,287 
86,910,506 
89,403,632 
99,123,549 

9,012 

1902-3 

9,378 

1903-4 

9,630 

1904-5 

9,784 

1905-6 

10,784 

In  the  above  table  only  the  earnings  of  the  rail  lines  are 
given.  The  earnings  of  the  water  lines,  &c,  increased  the  gross 
earnings  of  1905  by  $6,000,000.  and  in  1906  by  $6,500,000;  the 
gross  income  of  the  land  department  by  $4,700,000  in  1905,  and  by 
$6,000,000  in  1906,  bringing  the  total  earnings  of  the  company  for 
1906  up  to  $111,720,176,  as  against  a  total  of  $100,237,084  in  1905. 

The  average  freight  rates  of  the  Southern  Pacific  are  higher 
than  those  of  any  other  Pacific  road,  comparison  in  1906  being 
as  follows : 

Southern    Pacific 1.02c. 

Atchison 93 

Union  Pacific 91 

Northern  Pacific 83 

Great   Northern 79 

Canadian    Pacific 74 

It  will  be  seen  from  the  above  that  the  average  rates  of  the 
Southern  Pacific  are  more  than  25%  higher  than  those  of  the 
Great  Northern,  and  almost  equally  ahove  the  Northern  Pacific. 
With  the  completion  of  the  Portland  &  Seattle  line  from  Spokane 
to  Portland,  the  Great  Northern  and  Northern  Pacific  will  have 
a  water  grade  route  from  the  "inland  empire"  of  Washington 
State  to  the  coast,  which  will  cut  out  one  of  the  two  mountain 


SOUTHERN   PACIFIC 


663 


ranges  which  they  traverse  and  will  put  these  two  roads  in  an 
almost  impregnable  position  for  the  carriage  of  over-land  traffic. 
[t  is  obvious  that  they  will  be  in  much  better  position  to  meet 
either  a  reduction  in  rates,  should  business  necessitate,  or  the 
prospective  competition  of  the  Panama  Canal.  On  the  other 
hand,  it  may  be  argued  that  the  Southern  Pacific  has  turned 
back  enormous  sums  into  the  improvements  of  its  property,  with 
the  consequent  steady  reduction  in  the  cost  of  conducting  trans- 
portation and  that,  even  though  its  gross  revenues  might  con- 
siderably be  reduced  by  a  reduction  in  rates,  it  has  a  higher  level 
from  which  this  reduction  might  be  made  than  the  other  roads, 
and  that  a  very  considerable  reduction  might  sufficiently  enlarge 
its  traffic  to  make  little  sensible  difference  in  the  gross  or  net 
earnings. 

It  is  to  be  noted,  however,  that  the  average  rates  of  the 
Southern  Pacific  in  1906  were  slightly  higher  than  in  the  general 
bedrock  year  of  1899,  when  they  were  .95c,  while  the  average 
rates  of  the  Northern  roads  have  very  sensibly  decreased.  This 
fact  may  have  a  material  bearing  in  the  discussion  of  freight  rates, 
and  likewise  whether  the  Union  Pacific-Southern  Pacific  joint 
ownership  constitutes  a  combination  in  restraint  of  trade. 

Maintenance. 

For  a  number  of  years  the  Southern  Pacific  has  very  heavily 
charged  its  maintenance  account  for  improvements,  its  average 
charges  being  higher  than  those  of  any  other  Pacific  road  and  over 
$1,100  per  mile  higher,  for  example,  than  the  average  charges 
of  the  Great  Northern. 


Year 

Traffic  Density 

Maintenan 

ze  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

563,056 
566,130 
569,487 
591,423 
600,738 
678,554 

$1,175 
1,381 
1,478 
1,364 
1,503 
1,775 

$901 
1,042 
1,222 
1,335 
1,421 
1,554 

$2,076 
2,423 
2,700 
2,699 
2,924 
3,329 

Average 

594,898 

$1,446 

$1,246 

$2,692 

Atchison 557,005 

Union  Pac...           739,206 
North  Pac                 729,102 

Gt  North 650,321 

Mo.  P.  (2yrs.)           623,807 
Burlington. . . .           580,024 

$1,123 

1,173 

1,300 

960 

819 

1,104 

$1,113 

1,049 

791 

594 

821 

1,032 

$2,236 
2,222 
2,091 
1,554 
1,640 
2,136 

(.04  SOUTHERN  PACIFIC 

It  will  be  seen  from  the  comparisun  adduced  above  that,  had 
the  Southern  Pacific's  nominal  maintenance  charges  been  on  a 
Great  Northern  basis,  the  surplus  shown  annually  would  have 
amounted  to  over  $1,100  per  mile  more  than  it  did;  that  is  to 
say,  in  the  neighborhood  of  $10,000,000,  or  upwards  of  $50,000,- 
000  for  the  six  years  under  view.  Nor  was  there  any  reduction 
in  this  disparity  for  1906.  For  example,  the  Great  Northern's 
nominal  maintenance  for  1906  was  on  a  basis  of  $1,908  per  mile, 
as  compared  with  $3,309  per  mile  for  the  Southern,  an  average 
difference  of  over  $1,400  per  mile.  This,  distributed  over  9,000 
miles  of  road  would  have  made  a  total  difference  in  the  surplus 
shown  of  over  $12,000,000.  This  is  a  large  sum.  even  for  a  road 
of  the  huge  operated  mileage  of  the  Southern  Pacific.  There  is 
no  reason  to  suppose  that  the  normal  maintenance  of  the  one 
road  should  be  75c/c  higher  than  the  other,  and  this  indicates 
clearlv  enough  the  wide  margin  for  a  reduction  of  the  operating 
expenses  which  the  Southern  Pacific  has  in  case  of  need. 

Improvements  from  Earnings. 

Like  the  Burlington  road,  the  Southern  Pacific  has  charged 
a  large  amount  of  improvements  directly  to  operating  expenses 
not  shown  separately  in  income  account,  so  that  there  were 
no  further  appropriations  from  surplus  for  improvements,  as  with 
most  other  Pacific  roads.  These  separate  appropriations  for  six 
years  amounted  on  the  Union  Pacific  to  nearly  $20.000,000 ;  on 
the  Great  Northern  to  $15,000,000;  on  the  Northern  Pacific  to 
$20,000,000  and  on  the  Atchison  to  nearly  $16,000,000.  If  the 
excess  maintenance  charges  on  the  Southern  Pacific  had 
amounted  for  six  years  to  no  more  than  $500  per  mile — a  low 
estimate — this  would  have  been  equivalent  to  an  annual  appro- 
priation for  improvements  in  excess  of  S4.000.000,  or  a  total  for 
the  six  years  under  view  of  around  S25.000.000. 

It  appears  from  the  reports  that  in  these  six  years  upwards  of 
$100,000,000  has  been  expended  by  the  Southern  Pacific  in  the 
construction  of  new  lines  and  the  reconstruction  and  betterment 
of  existing  lines,  equipment,  &c.  and  that  a  part  of  this  expendi- 
ture was  provided  for  from  surplus  earnings,  but  the  amounts 
of  the  latter  were  not  separately  shown. 

Largely  in  consequence  of  this  enormous  expenditure  there 
has  been  a  steady  decrease  in  the  cost  of  conducting  transporta- 
tion, the  proportion  of  gross  income  required  for  conducting  trans- 


SOUTHERN  PACIFIC 


665 


portation  and  general  expenses  falling,  according  to  Mr.  Mnndy's 
table,  from  above  37%  in  the  fiscal  years  of  1903-4  to  a  little  over 
31%  in  1906.  It  is  further  stated  in  the  reports  that  during  the 
year  of  1906  cost  of  fuel  for  locomotives  decreased  $952,02-'. 
resulting  from  the  extended  use  of  oil  for  fuel  and  from  the 
greater  capacity  of  the  locomotives. 

Surplus  Earnings. 

In  the  following  table  the  various  sums  charged  oft*  for  the 
depreciation  of  equipment,  &c,  have  been  added  to  the  nominal 
surplus  shown  in  the  reports  of  the  company.  These  items  wen' 
not  considerable,  save  in  the  year  of  1906,  when  included  in  the 
surplus  shown  below  was  $2,117,286  set  aside  as  a  reserve  for 
maintenance,  renewals,  &c,  and  charged  into  maintenance  ex- 
penses. Under  this  arrangement  the  surplus  earnings  for  six 
years  have  shown  as  follows : 


Year 

Surplus 

Dividends 

Paid  on 

Preferred 

Per  cent. 

Earned  on 

Common 

Average 
Price 

1900-1 

$10,492,512 

10,990,285 

9,462,588 

9,593,214 

13,124,415 

22,030,656 

7 

5.3 
5.5 
4.7 
4.8 
6.6 
9.7 

51 

1901-2 

66 

1902-3 

1903-4 

51 
52 

1904-5 

66 

1905-6 

79 

It  will  be  seen  from  the  above  that  the  increase  for  1906 
was  quite  extraordinary.  This  was  due  partly  to  decreased  interest 
charges  from  the  sale  of  $39,500,000  of  new  preferred  stock  and 
with  this  retiring  a  large  floating  debt ;  for  the  rest,  to  a  heavy  in- 
crease in  earnings.  The  showing  was  not  made  at  the  cost  of  main- 
tenance charges,  since  the  latter  were  over  $400  per  mile  greater  in 
1906  than  in  1905,  or  an  increase  of  nearly  25%,  while  the  gross 
earnings  of  the  company  increased  only  a  little  over  10%. 

As  already  noted,  owing  to  the  great  improvements  effected 
in  the  road,  the  company  was  able  in  1906  to  earn  $10,000,000 
more  in  gross  over  1905,  with  no  increase  in  the  cost  of  conduct- 
ing transportation.  This  is  scientific  railroading  and  indicates 
that  the  large  increase  in  the  surplus  shown  was  upon  a  healthy 
basis,  and  really  represents  the  increased  earnings  capacity  of 
the  company's  capital.  This  increase  was  sufficient  to  provide 
for  the  7%  dividends  on  the  $39,500,000  of  preferred  stock  issued 


666  SOUTHERN  PACIFIC 

in  the  year  preceding,  and  still   raise  the  percentage  earned  on 
the  common  stock  from  6.6%  in  1905  to  9.7%  in  1906. 

The  Balance  Sheet. 

So  complicated  are  the  accounts  of  the  various  companies 
constituting  the  Southern  Pacific  system  that  it  is  extremely  dif- 
ficult to  determine  the  actual  ledger  conditions  of  the  system  at 
the  close  of  its  fiscal  year. 

Excluding  materials  and  other  supplies,  the  balance  sheet,  as 
of  June  30th,  1906,  showed: 

Current  Assets $21,629,872 

Current  Liabilities 19,238,252 

Leaving  a  working  halance $  2,391,620 

There  were  deferred  assets,  consisting  principally  of  ad- 
vances to  other  lines,  including 

The  purchase  of  steamships,  &c $48,255,184 

Due  from  proprietary  companies 19,786,944 

Contingent   Assets 3,846,232 

Total $71,888,360 

Due  to  proprietary  companies 51,414,142 

Contingent  liabilities,  including  replace- 
ment funds,  maintenance,  reserves, 
&c ' 15,021,193 

Of  the  amount  due  to  proprietary  companies  $38,386,293 
was  due  to  the  Southern  Pacific  Company,  all  of  whose  stock  is 
owned  by  the  Railway  Company,  so  that  this  item  was  merely 
a  matter  of  bookkeeping. 

The  item  of  cash  on  hand  amounted  to  $14,530,551  and  the 
balance  to  credit  of  profit  and  loss  at  the  close  of  the  year  was 
$16,701,033. 

Investment  Value. 

The  preferred  stock  of  the  Southern  Pacific,  with  the  1907  issue 
of  $36,000,000  added,  amounted  to  only  about  12%  of  the  gross 
capitalization  of  the  system.  As  the  fixed  charges  in  1906  consumed 
only  49%,  the  margin  of  safety  for  the  payment  of  this  dividend  is 
wide.  It  is  a  seven  per  cent,  non-cumulative  stock,  redeemable  at  any 
time  up  to  July  1st.  1910,  at  115,  and  is  convertible  into  common 


SOUTHERN  PACIFIC  667 

stock  at  par  al  the  option  of  the  holder.  The  fact  that  this 
stock  is  convertible  at  a  fixed  price,  at  the  option  of  the  com- 
pany, up  to  a  certain  date,  tends  naturally  to  make  it  sell  some- 
where near  this  price,  and  not  as  much  above  as  it  otherwise  might. 
The  average  price  of  1906  was  around  117,  and  on  this  basis  its 
yield  to  the  investor  is  6%  flat.  As  a  matter  of  fact,  there  was 
in  1907  very  little  prospect  of  this  stock  being  redeemed.  There 
seemed  little  likelihood  that  the  pressure  for  money,  which  has 
made  it  so  difficult  for  railroads  to  finance  improvements  and 
additions,  would  relax  sufficiently  to  enable  the  Southern  Pacific 
to  obtain  funds  at  a  sufficiently  low  rate  to  make  the  redemption 
of  this  stock  profitable.  It  appears,  therefore,  to  be  a  solid  7% 
security,  with  ample  margin  of  safety  for  its  dividend,  and 
yielding  at  the  prevailing  rate  as  high  an  interest  as  the  best 
short-term  railway  notes.  On  the  other  hand,  the  stock  is  con- 
vertible into  common  stock  at  par. 

In  1906  the  common  stock  was  placed  on  a  5%  basis,  amply 
justified  by  the  earnings  of  the  road  and  with  a  larger  prospect  of 
the  dividend  being  increased  than  reduced.  The  earnings  of  the 
road  for  the  fiscal  year  of  1907  were  enormous,  and  as  the 
Union  Pacific  owns  very  nearly  half  of  the  common  stock,  to- 
gether with  very  nearly  half  of  the  preferred  stock,  there  seems 
every  reason  to  believe  that  a  liberal  dividend  policy,  once  begun, 
will  be  continued. 

The  holder  of  the  preferred  stock,  therefore,  has  the  pros- 
pect of  being  able  to  convert  his  preferred  into  other  stock,  not 
perhaps  yielding  7°/o,  but  on  a  possible  6%  basis,  likely  to  sell 
at  a  rather  higher  figure  than  the  prevailing  prices  for  the 
preferred,  should  money  conditions  return  to  a  more  normal  basis. 
The  question  is,  therefore,  what  is  the  prospect  for  an  increase 
of  the  dividend  on  the  common. 

The  report  of  1906  showed  that  the  company  had  under  con- 
struction or  projected,  over  1,600  miles  of  new  track,  including  a 
line  down  the  Mexican  coast  to  Guadalajara,  about  775  miles. 
The  Union  Pacific  system  likewise  was  building  northward  from 
Portland  to  Tacoma  and  Seattle,  and,  while  the  majority  of  the 
business  which  this  new  road  may  gather  will  probably  be 
turned  towards  the  Oregon  Short  Line,  it  will  mean  that  the  South- 
ern Pacific  will  no  longer  be  dependent  upon  traffic  agreements 
for  a  through  line  from  San  Francisco  and  other  California  points, 
to  Puget  Sound. 


668  SOUTHERN  PACIFIC 

But,  while  the  Union  Pacific-Southern  Pacific  system  was 
thus  engaged  in  a  vigorous  policy  of  extending,  other  lines  were 
equally  active.  The  Western  Pacific  was  building,  as  an  exten- 
sion of  the  Denver  &  Rio  Grande  -that  is  to  say,  the  Gould  sys- 
tem— a  line  paralleling  the  Central  Pacific  portion  of  the  Southern 
Pacific,  from  Ogden  to  San  Francisco,  crossing  and  recrossing  it 
and  offering  a  line,  if  not  shorter,  at  least  of  lower  grades. 

Likewise  the  Southern  Pacific  will  no  longer  have  undis- 
puted possession  of  the  traffic  westward  from  New  Orleans,  since 
the  St.  Louis  &  San  Francisco — that  is  to  say,  the  Rock  Island 
system — has  obtained  entry  into  that  port.  The  Kansas  City 
Southern  is  likewise  building  a  New  Orleans  line,  and  it  is  to  be 
presumed  that  the  Colorado  Southern  will  have  trackage  rights 
in  connection  with  the  'Frisco  line.  There  has  also  been  exten- 
sive building  of  rival  lines  in  Texas,  paralleling  many  important 
portions  of  the  Southern  Pacific  in  that  great  State.  In  other 
words,  in  at  least  two  large  sections  the  Southern  Pacific  must 
meet  a  much  more  effective  competition  than  it  has  had  hitherto. 
Given,  however,  that  the  business  of  the  country  undergoes  no 
serious  recession,  there  seems  no  likelihood  that  this  should 
vitally  impair  the  earnings  of  the  road,  and  while  it  might  be 
compelled  to  reduce  its  rates,  this  might  readily  be  offset  by  an 
increase  in  business. 

By  a  compact  concluded  in  1906  the  threatened  competition 
of  the  Atchison  lines  in  northern  California  was  eliminated 
through  the  formation  of  a  company  to  be  operated  in  the  joint 
interest  of  the  two  roads.  So  long,  therefore,  as  the  Southern's 
relation  with  the  Atchison  remain  friendly,  and  the  Union  Pacific 
interests  are  permitted  to  retain  a  considerable  amount  of  Atch- 
ison stock,  there  seems  no  threat  of  competition  from  this  source 
which  would  affect  its  revenues.  The  Southern  Pacific  is,  quite 
apart  from  its  connection  with  the  Union  Pacific,  a  system  of 
enormous  extent,  covering  a  wide  variety  of  territory  and,  there- 
fore, of  traffic.  The  activity  of  copper  mining  in  Arizona  and 
Mexico  has  added  a  high-grade  and  very  profitable  source  of 
revenues,  and  the  development  of  arid  regions  through  irrigation, 
with  large  government  aid,  can  only  tend  in  the  same  direction. 
It  would  require,  therefore,  a  business  depression  of  continental 
range  vitally  to  affect  the  earnings  of  the  Southern  Pacific,  and 
it  would  require  a  very  serious  depression  to  impair  the  perma- 
nence   of    its    dividends.      Unless,    therefore,    such    a    depression 


SOUTHERN  PACIFIC  669 

should  come,  the  securities  of  the  Southern  Pacific  would  appear 
to  be  as  attractive  as  any  to  be  found  on  the  list. 

The  Southern  Pacific  has  for  a  number  of  years  been  a  spec- 
ulative favorite  and  has  become  especially  so  since  the  unusual 
declaration  of  an  initial  dividend  of  5%.  Because  of  its  market 
position,  the  stock  is  liable  to  find  its  way  into  weak  hands  and 
therefore  to  be  subject  to  very  wide  fluctuations  in  price.  After 
the  payment  of  the  5%  dividend,  the  common  sold  as  high  as 
'Vj/2,  declining  in  the  severe  slump  of  March,  1907,  as  low  as  70. 
'Phis  decline  was  in  the  face  of  an  astonishing  increase  of  gross 
earnings  (though  not  of  net).  While  it  seems  improbable  that  the 
extraordinary  increase  in  its  earnings  can  continue  at  the  same  rapid 
rate,  it  would  seem  that  nothing  short  of  a  severe  reaction  in  trade 
would  prevent  at  least  a  steady  increase,  and  if  this  was  realized,  the 
stock  might  readily  be  placed  upon  a  6%  basis.  If  at  the  same  time, 
money  rates  were  to  fall  to  a  more  normal  level,  this  would  tend  to 
put  the  stock  considerably  above  par.  At  any  considerable  premium, 
prospect  of  a  further  advance  would  of  course  be  weighted  by 
possibility  of  the  conversion  of  at  least  a  part  of  the  $75,000,000  of 
7%  preferred.  The  Union  Pacific,  holding  nearly  half  of  the  pre- 
ferred,  subscribed  for  at  par,  would  of  course  have  no  interest  in 
converting,  unless  the  common  were  raised  to  better  than  a  7% 
basis;  and  the  same  is  true,  doubtless,  of  a  considerable  part  of  the 
remaining  holdings. 

At  a  valuation  of  $83  per  share,  the  common  stoek  yields  the 
investor  6%,  and  purchased  at  anything  like  these  figures,  would 
seem  to  represent  an  attractive  investment.  The  purchaser, 
however,  will  bear  in  mind  the  point  noted  above — that  the 
stuck  is  liable  to  wide  fluctuations,  and  he  will  therefore  take 
care  to  buy  it  only  on  sharp  recessions  and  at  such  figures  as 
would  enable  him  to  view  a  still  further  decline  with  equanimity. 


SOUTHERN  RAILWAY. 

The  larger  part  of  the  old  "South"' —that  is  to  say,  the  territory 
lying-  to  the  south  of  the  Norfolk  and  Western  and  to  the  east  of 
the  lines  of  the  Illinois  Central  along  the  Mississippi  River,  is 
practically  monopolized  by  three  great  systems.  These  are  the 
Atlantic  Coast  Line,  which  through  its  ownership  of  the  Louisville 
and  Nashville  and  several  subsidiary  roads  controls  about  11.000 
miles  of  rail;  the  Seaboard  Air  Line  controlling  a  little  short  of 
3,000  miles  of  road  along  the  Atlantic  coast;  and  the  Southern 
Railway,  which  with  it  ownership  of  subsidiary  roads  controls  about 
the  same  mileage  as  the  Atlantic  Coast  System. 

The  Southern  Railway  is  a  relict  from  one  of  the  exploits  of 
Jay  Gould  and  directly  a  reorganization  of  the  old  Richmond 
Terminal,  which  played  so  large  a  part  in  stock  market  operations 
in  the  Gould  days.  The  Southern  directly  operates  about  7. 5m) 
miles  of  rail  and  controls  by  stock  ownership  about  1,800  miles  more  ; 
practically  the  same  interests  which  control  the  Southern  are  domi- 
nant in  the  Central  of  Georgia  Railroad  with  nearly  1,800  miles 
of  additional  line. 

The  Southern  extends  southwards  from  Washington  and  Nor- 
folk to  Atlanta,  Ga.,  and  Jacksonville,  l;la..  with  branches  through 
Chattanooga  to  Memphis;  through  Birmingham  to  Greenville  on 
tin-  Mississippi;  and  from  Birmingham  southward  to  Mobile.  It 
has  also  a  line  joining  the  Cincinnati  and  New  <  )rleans  at  Lexington, 
Ky.,  and  extending  from  there  to  St.  Louis.  To  all  intents  the 
Mobile  and  Ohio,  extending  from  St.  Louis  to  Mobile;  the  Alabama 
Great  Southern;  the  Georgia  Southern  and  Florida;  and  the  North- 
ern Alabama  are  part  of  the  Southern  system,  although  operated 
separately. 

Jointly  with  the  Cincinnati,  Hamilton  and  Dayton  the  Southern 
controls  the  Cincinnati,  New  Orleans  and  Texas  Pacific,  and  jointly 
with  the  Louisville  ami  Nashville  il  controls  the  Monon;  through 
these  its  line  reach  to  Cincinnati  and  to  Chicago  on  die 
Xorth.  Its  network  of  railways  forms  a  compact  and  homogeneous 
system  which  largel)  dominates  one  of  the  richest  sections  ol  the 
United  States. 

(670) 


SOUTHERN  671 

History. 

The  Richmond  and  West  Point  Terminal  Railway  and  Ware- 
house Company,  usually  known  as  the  Richmond  Terminal,  came 
into  existence  in  1880,  largely  for  the  purpose  of  carrying  out  Mr. 
Gould's  plan  of  consolidating  a  huge  system  of  southern  railroads. 
Through  purchase  of  stock  it  gained  control  of  the  old  Richmond 
and  Danville,  the  East  Tennessee,  Virginia  and  Georgia,  and  the 
Central  Railroad  and  Banking  Company  of  Georgia.  All  told  it 
had  built  up  before  the  crash,  a  system  of  nearly  8,500  miles. 

The  Richmond  and  Danville  at  the  time  it  was  taken  over, 
embraced  about  3,150  miles  of  railroad.  The  company  originated  in 
1847  and  the  line  from  Richmond  to  Danville  was  opened  in  1856. 
Until  its  disastrous  lease  of  the  Georgia  Pacific,  it  was  a  highly 
prosperous  road  and  paid  as  high  as  10%  dividends. 

The    East    Tennessee,    Virginia    and    Georgia    Railroad,  "Vith 

about  2,500  miles  of  road,  represented  the  consolidation  of  various 
small  lines,  the  consolidated  company  being  sold  under  foreclosure 
in  1886  and  succeeded  by  a  Railway  company  of  the  same  name. 

The  Central  Georgia  was  one  of  the  oldest  railways  of  the 
country  having  been  begun  far  back  in  1835,  and  completed  in  1843. 
With  the  amalgamation  of  several  smaller  lines  it  operated  at  the 
time  it  became  a  part  of  the  Richmond  Terminal  system,  about  1,600 
miles  of  road.  It  was  leased  to  the  Georgia  Pacific,  which  in  turn 
was  leased  by  the  Richmond  and  Danville.  Up  to  the  time  it  was 
taken  over  it  had  been  a  very  well  operated  company  but  in  the 
disasters  that  followed  the  consolidation,  it  went  into  bankruptcy 
and  many  well-to-do  Southern  families  were  ruined. 

In  1892  the  system  passed  into  the  hands  of  receivers,  having 
defaulted  its  interest  payments,  and  in  the  reorganization  that 
followed  the  Central  of  Georgia  was  returned  to  its  owners  to  be 
reorganized,  and  the  balance  of  the  system  was  consolidated  in  the 
new  Southern  Railway  Company,  operating  directly  about  4,100 
miles  of  track.  Since  then,  by  the  merger  of  various  small  lines,  it 
has  been  steadily  built  up  until  it  now  operates  directl}  about  3,400 
miles  additional,  and  controls  directly  through  stock  ownership  1,800 
miles  more. 

The  gross  earnings  of  the  company  in  the  first  year  of  its 
operations  were  ,$17,000,000,  and  in  1906  over  $53,000,000,  a  gain  of 
more  than  200%. 


672  SOUTHERN 

Ownership. 

The  control  of  the  reorganized  company  was  vested  in  a  voting 
trust  consisting  of  J.  Pierpont  Morgan,  Charles  Lanier,  of  the 
hanking  firm  of  Winslow,  Lanier  and  Company,  and  George  F. 
Baker,  president  of  the  First  National  Bank.  New  York.  This 
voting:  trust  still  survives.  The  Southern  is  known  as  one  of  the 
"Morgan"'  lines,  and  is  understood  to  be  dominated  by  Morgan 
interests. 

The  directorate  of  1906  included  Charles  Steele  of  the  firm  of 
J.  P.  Morgan  and  Company ;  James  T.  Woodward,  president  of 
the  Hanover  National  Bank,  understood  to  be  associated  with 
Morgan  interests;  Charles  Lanier  of  the  banking  firm  of  Winslow. 
Lanier  and  Co.,  New  York;  Adrian  Iselin.  Jr.,  vice-president 
of  the  Buffalo,  Rochester  and  Pittsburg,  and  a  director  in  the 
Gallatin  National  Bank.  New  York;  Robert  M.  Callaway,  president 
of  the  Merchants  National  Bank,  also  a  director  in  the  Monon,  the 
1  Tricking  Valley,  and  in  several  Gould  lines  of  the  West,  including 
the  Iron  Mountain.  Texas  Pacific  and  so  forth ;  Edmund  D.  Ran- 
ph.  ex-treasurer  of  the  New  York  Life  Insurance  Company: 
Harris  C.  Fahnestock,  vice-president  of  the  First  National  Bank, 
New  York,  also  a  director  in  the  Lackawanna,  the  Central  Railroad 
t  New  Jersey,  and  other  companies;  Samuel  M.  Inman,  of  Atlanta. 
Georgia  :  Joseph  Bryan,  of  Richmond,  Va. ;  Alexander  B.  Andrews, 
first  vice-president  of  the  Southern  Railway.  Raleigh,  X.  C. :  and 
William  W.  Finlcv.  president,  Washington,  D.  C. 

In  1905  the  Southern  Railway  reported  9,572  share  holders. 

Save  as  to  its  subsidiary  mads,  the  Southern  has  no  special 
affiliations  with  other  lines \  but  a-  already  stated  the  Central  of 
Georgia  is  under  practically  the  same  ownership  and  the  two  lines 
are  operated  in  close  association.  Naturally  the  road  participates 
to  some  extent  in  the  Vanderbilt-Pennsylvania-Morgau  community 
of  interest  scheme. 

Capitalization. 

Coming  as  it  did  as  a  reorganization  of  a  grossly  over-capital- 
ized company,  the  new  Southern  road  did  not  escape  the  evil  legacy 
of  its  predecessor  and  on  $120,000,000  of  common  stock  no  divi- 
dends have  ever  been  paid  or  earned.  It  is  instructive  to  note  that 
the  stock  capital  of  the  company  remains  the  same,  with  almost 
double  the  mileage  it  operated  at  the  beginning. 


SOUTHERN  673 

A  large  part  of  the  system  is  made  up  of  leased  lines  and  a 
part  of  the  capitalization  of  these  subsidiary  companies  is  given  in 
the  company's  reports.  It  is  difficult  to  sift  out  the  rented  lines 
from  those  whose  funded  debt  is  stated,  but  the  following  table 
gives  a  fair  approximation  of  the  actual  capitalization  of  the  road, 
as  of  June  30,  1906 : 

Common  stock $120,000,000 

Preferred  stock 60,000,000 

Total  stock $180,000,000 

Funded   debt 175,631,900 

Leased  lines 32,358,500 

Equip.  Obligations 24,033,216 

Total   capital $412,023,616 

Rentals  capitalized  at  4% 18,842,500 

Approx.    gross    capital $430,866,1 16 

Securities  held 67,890,646 

Approx.  net  capital $362,976,470 

Approx.  net  capital,  per  mile $49,223 

Average  miles  operated 7,374 

Net  earnings  on  net  capital 4.2% 

Stock  on  net  capital 50% 

Fixed  charges  on  total  net  income 69% 

Factor  of  Safety 31% 

It  will  be  seen  from  the  above  that  the  net  capitalization  is 
high.  The  estimate  of  $49,223  per  mile  compares  with  $47,453  per 
mile  for  the  Seaboard  Air  Line;  $28,403  for  the  Atlantic  Coast; 
$39,684  for  the  Louisville  and  Nashville ;  and  $31,771  for  the  Central 
of  Georgia. 

When  net  earnings  are  compared  with  the  estimated  net  capitali- 
zation, the  fact  of  over  capitalization  becomes  accentuated,  the  net 
earnings  of  1906  showing  only  4.2%  on  the  estimated  net  capital. 
This  is  slightly  higher  than  the  over-capitalized  Seaboard  Air 
Line,  whose  net  earnings  show  only  3.7%  on  the  net  capitalization. 
and  stands  against  7.1%  for  the  Atlantic  Coast  Line,  8.9%  for  the 
Louisville  and  Nashville,  and,  for  example,  against  6.7%  for  the 
Norfolk  and  Western  and  7%  for  the  Chesapeake  and  Ohio.  All  of 
41 


674  SOUTHERN 

these  figures  are  below  the  general  level  of  western  roads,  with 
about  the  same  mileage  earnings,  and  not  a  very  different  character 
of  traffic. 

But  of  this  high  capitalization  a  full  half  is  represented  b) 
stock  and  two-thirds  of  this  stock,  namely  the  $120,000,000  of  com 
mon,  represents  merely  possibilities. 

The  showing  of  Fixed  Charges  on  Total  Net  Income  however, 
is  not  favorable.  Even  in  the  highly  prosperous  year  of  1906,  the 
Fixed  Charges  consumed  nearly  70%  of  available  income,  leaving 
a  Factor  of  Safety  on  the  underlying  securities  of  only  30%  ;  and  in 
1907  the  proportion  of  Fixed  Charges  was  heavily  increased. 

On  the  Norfolk  and  Western,  for  example,  Fixed  Charges  were 
only  37%  in  1906,  on  the  Baltimore  and  Ohio  only  39%,  and  on  the 
Pennsylvania  only  38%.  In  other  words,  it  will  be  seen  that  the 
reorganized  system  is  still  heavily  loaded  with  debt,  and  is  not  in  a 
strong  position  to  stand  a  prolonged  period  of  adversity.  The 
Fixed  Charges  of  the  reorganized  company  were  not  heavily  scaled 
as  in  the  resuscitation  of  many  other  bankrupt  roads,  and  instead  of 
keeping  this  indebtedness  down  as  would  have  seemed  the  wiser 
policy,  the  company  has  added  practically  $100,000,000  of  debt  since 
it  was  reformed. 

Equities  Owned. 

Of  the  $67,000,000  of  securities  owned,  shown  in  the  table 
above,  $8,652,000  were  the  company's  own  development  and  general 
mortgage  bonds.  Practically  all  of  the  balance  of  these  securities 
was  pledged  under  the  various  mortgages. 

The  Southern  owns  $8,086,000  of  the  Mobile  and  Ohio  general 
mortgage  4%  bonds,  and  $5,672,200  stock.  On  this  stock  it  is  at 
present  receiving  5%  dividends  while  the  road  is  actually  earning 
about  20%  on  its  stock. 

The  Southern  owns  $4,898,450  of  the  common  stock  and  $1,- 
936,700  preferred  of  the  Monon,  constituting  one  half  of  the 
control  of  that  road.  It  receives  4%  on  the  preferred  and  3%  on 
the  common  and  the  latter  dividend  might  readily  be  doubled  on  the 
basis  of  present  earnings.  The  company  has  therefore  a  small 
equity  in  this  holding. 

The  balance  of  the  securities  amounting  to  par  value  of  over 
$30,000,000  is  grouped  as  "Miscellaneous"  without  being  further 
itemized.  In  1906  on  securities  of  a  book  valuation  of  $59,238,646 
the  company  received  a  little  over  2*/£%,  so  that  on  the  basis  of 


SOUTHERN  675 

the  1906  returns  the  book  valuation  would  be  excessive.  It  is  prob- 
able, however,  that  the  equities  in  the  undistributed  surplus  of  the 
various  subsidiary  companies  would  readily  bring  the  income  up  to 
a  figure  which  would  indicate  somewhere  near  the  book  valuation. 

Beyond  the  items  mentioned  the  Southern  could  not  greatly 
swell  its  income  by  increasing  the  distribution  of  its  controlled  com- 
panies. 

Increase  of  Capitalization. 

From  the  following  table  it  will  be  seen  that  since  1900,  while 
the  amounts  of  both  common  and  preferred  stock  have  remained 
stationary,  the  funded  debt  has  been  increased  $97,000,000. 


Year 


1900. 
1906. 


Common        Preferred  ]       Funded  Total 

Stock  Stock  Debt  Capital 


Gross 
Earnings 


$120,0000,00  $60,000,000   $135,859,592   $315,859,592  $31,388,015 
120,000,000!  60,000,000!     232,026, 165     412,026,165;     53,641,438 


Increase  over  six  years:    Total  Capital,  30%;    gross  earnings,  71%. 

The  effect  of  this  increase  in  debt  was  to  increase  the  nominal 
indebtedness  of  the  road  by  70%,  and  at  the  same  time  its  gross 
earnings  rose  71%.  This  was  not  a  remarkable  showing.  The  effect 
i  if  the  increase  in  earnings  has  simply  been  to  give  a  semblance  of 
value  to  a  large  amount  of  securities  which  had  otherwise  no  value 
whatever,  save  for  the  purpose  of  stock  control.  Had  this  increase 
in  the  capitalization  been  in  stock  instead  of  an  addition  to  an  already 
heavy  burden  to  the  Fixed  Charges,  the  company  would  have  been 
in  a  very  different  position  from  what  it  is  now. 

Character  of  Traffic. 

The  passenger  earnings  of  the  road  are  relatively  high,  consti- 
tuting about  one-quarter  of  the  gross  earnings. 

Of  the  tonnage  moved  about  13%  is  farm  products,  of  which 
cotton  and  its  products  make  up  about  one-third.  Products  of  mines 
make  up  38%  of  the  gross  tonnage,  the  larger  part  being  carriage 
of  bituminous  coal.  Lumber  and  manufactures  make  up  the 
balance. 

The  management  has  apparently  not  been  able  to  increase  the 
average  train  load  at  the  same  rate  which  for  example  many  western 
roads  have  shown.  In  nine  years  from  1898  the  average  train  load 
has  increased  from  149  tons  to  204  tons.  The  average  receipts  per 
ton-mile   have   remained    practically    stationary    within   this   period, 


676 


SOUTHERN 


amounting  to  .93c.  per  ton  per  mile  in  1898  and  1906.  In  the  same 
period  average  receipts  per  freight  train  mile  have  risen  from  $1.39 
to  $1.90. 

Stability  of  Earnings. 

The  increase  in  earnings  in  the  ten  years  ended  in  1906  has 
been  something  extraordinary.  As  noted  above  the  average  of 
freight  rates  received  has  been  unchanged  so  that  the  entire  increase 
of  earnings  has  been  due  to  an  increase  of  business.  In  these  ten 
years  the  operated  mileage  has  increased  about  57%  while  in  tin- 
same  period  the  gross  earnings  have  increased  more  than  200rc  . 
As  a  result  of  this  tremendous  advance  the  gross  earnings  per  mile 
have  risen  from  $3,970  to  $7,274,  an  increase  of  82%.  This  in- 
crease has  been  steady,  showing  no  check  from  year  to  year,  as  the 
following  table  reveals: 


Year 


Miles  Operated 


Gross  Earnings 


Per  Mile 


1896-7. 
1897-8. 
1898-9. 
1899-0. 
1900-1. 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1905-6. 


4,806 

4,938 

5,3781 

6,365 

6,425 

6,744 

7,129 

7,164 

7,199 

7,374 


$19,079,500 
21,095,839 
25,353,686 
31,388,015 
33,607,582 
37,712,248 
42,354,060 
45,109,777 
48,145,108 
53,641,438 


$3,970 
4,272 
4,714 
4,947 
5,230 
5,592 
5,941 
6,297 
6,688 
7,274 


The  very  remarkable  increase  in  earnings  for  1906  will  not 
escape  the  attention  of  the  investor,  the  sheer  increase  amounting  to 
nearly  $600  per  mile.  If  anything  like  this  rate  of  increase  over  ten 
years  could  continue,  it  is  obvious  that  the  Southern  would  soon  be 
in  a  strong  position.  In  the  1906  report,  the  company  points  out 
that  since  June  30th.  1895,  the  road  has  added  nearly  a  thousand 
locomotives,  increasing  the  number  to  1.541.  it  has  doubled  the  num- 
ber of  passenger  cars,  and  it  has  more  than  tripled  the  number  of 
freight  cars. 

Maintenance. 

But  while  this  great  increase  of  earnings  has  taken  place,  there 
has  been  no  corresponding  increase  in  the  sums  devoted  to  the 
maintenance  of  the  road.  In  the  six  years  from  1901,  the  traffic 
density  has  risen  by  nearly  one-half.  In  the  meantime  the  average 
of  maintenance  of  way  per  mile  has  risen  only  from  $846  to  $965 
per  mile.    The  outlay  in  1901  may  have  been  liberal,  though  it  does 


SOUTHERN 


677 


not  seem  so,  but  in  any  event  it  is  difficult  to  believe  that  an  added 
traffic  density  of  nearly  50%  could  be  cared  for  by  an  added  mainte- 
nance of  way  of  only  $120  per  mile. 

The  maintenance  of  equipment  has  increased  with  the  increase 
of  the  traffic,  and  in  1906  was  undoubtedly  liberal.  Probably,  how- 
ever, between  the  two  there  was  no  excessive  expenditure  and  no 
earnings  concealed  in  these  items.  The  table  for  six  years  is  as 
follows : 


Ypar 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

364,833 
397,184 
414,469 
449,227 
467,893 
524,317 

$846 
855 
804 
796 
897 
965 

$764 

838 

970 

1,014 

1,035 

1,164 

$1,610 
1,693 
1,774 
1,810 
1,932 
2,129 

Average 

435,987 

$860 

$964 

$1,824 

L.  &N 

111.  Central 

So.  Pacific  . . . 

929,594 
311,366 
259,769 
1,180,351 
594,898 

1,490 

620 

709 

1,386 

1,446 

1,537 

611 

556 

1,486 

1,246 

3,027 
1,221 
1,265 
2,872 
2,692 

Compared  with  the  other  southern  roads  it  will  be  seen  that  the 
Southern  makes  a  very  favorable  showing,  but  it  will  be  remembered 
that  the  standard  of  southern  roads,  with  the  exception  of  the  Louis- 
ville and  Nashville,  is  not  high. 

Improvements  from  Earnings. 

By  1904  the  surplus  shown  had  reached  so  favorable  a  figure 
that  the  road  was  able  to  begin  to  devote  a  part  of  its  surplus  for 
betterments  and  in  three  years  the  following  sums  were  set  aside : 

1903-4 $773,806 

1904-5 1,056,549 

1905-6 999,827 

Total $2,830,182 

Laid  out  over  upwards  of  7,000  miles  of  track  these  are  not  very 
large  sums,  and  cannot  of  course  be  compared  with  northern  and 
western  roads.  For  example,  the  Norfolk  and  Western,  with  present 
earnings  per  mile  not  very  greatly  in  excess  of  the  Southern  an : 
ab»ut  the  same  average  of  maintenance,  has  in  these  same  three 


678 


SOUTHERN 


years  turned  back  into  the  road  for  betterments,  $14,600,000.  Simi- 
lar large  sums  have  been  set  aside  by  the  roads  of  the  middle  West. 
The  reason  that  the  northwestern  roads  are  able  to  make  these  lavish 
outlays  from  earnings  and  still  pay  large  dividends  on  their  entire 
capital  stock  is  that  they  are  on  the  average  capitalized  for  about 
$30,000  per  mile  as  against  $50,000  per  mile  for  the  Southern  Rail- 
way, and  because  their  Fixed  Charges  consume  only  from  40% 
to  45%  of  their  available  surplus  income,  as  against  nearly  70% 
for  the  Southern.  It  is  not  due  to  any  difference  in  earnings,  or  in 
economy  of  operation,  and  is  a  very  practical  illustration  of  what 
over-capitalization  means.  It  is  in  consequence  of  this  that  the 
common  stock  of  these  northwestern  roads  sells  at  around  $200  per 
share,  while  that  of  the  Southern  is  a  purely  speculative  article  at 
from  $20  to  $40  per  share. 

Surplus  Earnings. 

Another  consequence  of  the  same  fact  is  that  the  surplus  avail- 
able for  dividends  on  the  Southern  has  never  shown  more  than  a 
bare  10%  on  its  net  income,  while  many  well-managed  roads  like 
the  St.  Paul  frequently  show  as  high  as  25%. 

From  the  following  table  it  will  be  seen  that  in  the  six  years  up 
to  1906,  little  or  nothing  has  ever  been  earned  on  the  common  stock, 
above  the  full  5%  on  the  preferred. 


Year 

Surplus 

Dividend 

Paid  on 

Preferred 

Per  cent. 

Earned  on 

Common 

Average 
Price  Vot 
Trust  Certifs. 

1900-1 

$3,540,500 
3,600,897 
3,707,477 
4,180,399 
5,151,632 
5,229,065 

4 
5 
5 
5 
5 
5 

.45 

.5 

.58 

.98 
1.79 
1.85 

27 

1901-2 

32 

1902-3 

26 

1903-4 

28 

1904-5 

33 

1905-6 

38 

Dividend  Record. 

In  1897  a  one  per  cent,  dividend  was  begun  on  the  $60,000,000 
of  preferred  stock,  increasing  to  2%  in  1899,  3%  in  1900,  4%  in 
1901.    The  full  5%  has  been  paid  from  1902. 

The  Balance  Sheet. 

On  June  30th,  1906,  the  balance  sheet  showed: 
Current  assets $14,685,966 


Current  liabilities. 


12,346,045 


Leaving  a  credit  balance  of $2,339,921 


SOUTHERN  679 

The  item  of  cash  amounted  to  $5,473,300,  and  the  credit  to 
Profit  and  Loss  was  $8,341,744. 

In  addition  to  the  liabilities  grouped  up  under  these  amounts, 
there  were  a  number  of  larger  items  not  so  included,  e.g. 

Certificates   of  indebtedness $1,750,000 

Account    of    purchase    of    Tennessee    Central 

bonds   unmatured 2,750,000 

Account  of  new  steel  rail  purchase  unmatured  2,660,250 
Balance  of  purchase  price  of  the  Northeastern 

of  Georgia 107,000 

Interest  and  rentals  accrued  but  not  due 1,400,616 

Taxes  accrued  but  not  due 606,323 

Reserve  for  dividends  payable 1,500,000 

Total $10,774,189 

Against  these  liabilities  there  were : 

Bills  receivable,  deferred  but  secured $1,277,995 

Advances  to  subsidiary  companies 3,116,457 

Sundry  accounts 489,752 


$4,884,204 


It  will  be  seen  therefore  that  above  its  nominal  working  capital 
the  company  had  at  the  close  of  its  fiscal  year  a  considerable  amount 
of  obligations  requiring  speedily  to  be  funded  in  one  way  or  another. 

Investment  Value. 

The  report  of  1906  stated  that  the  rapid  increase  in  the  business 
of  the  road  required  larger  expenditures  than  hitherto  and  to  meet 
these  expenditures  the  road  began  the  issue  of  more  bonds.  It 
created  in  1906  a  development  and  general  mortgage  of  an  authori- 
zed amount  of  $200,000,000,  $15,000,000  par  value  of  this  being 
issued. 

In  January  of  1907  $15,000,000  of  3-year  5%  notes  were  sold 
at  a  considerable  discount. 

The  effect  of  this  note  issue  and  some  smaller  bond  issues  was 
to  raise  the  fixed  charges  for  1907  by  approximately  $1,000,000.  In 
the  meantime  net  earnings  showed  a  rather  terrific  slump.  With  a 
imall  increase  in  gross,  the  net  for  the  year  declined  more  than 
two  millions.     The  result  of  this,  with  no  considerable  increase  in 


680  SOUTHERN 

the  amount  of  other  income,  was  to  raise  the  proportion  of  fixed 
charges  to  total  net  income  to  above  85% — a  highly  significant 
figure.  The  surplus  remaining  was  decreased  by  more  than  half 
from  the  previous  year  and  was  insufficient  to  meet  the  full  5%  on 
the  preferred  stock,  though  the  half  yearly  dividend  of  two  and  one- 
half  per  cent,  was  declared  in  March.  The  preferred  stock  is  entitled 
to  a  5%  non-cumulative  dividend.  In  January  of  1906  it  sold  at 
$103  per  share  and  in  April  of  1907  it  sold  at  $63  per  share.  The 
proportion  of  expenses  and  taxes  to  the  gross  in  1906  was  74%  and 
in  1907  this  rose  to  around  78%.  It  is  obvious  that  unless  the  com- 
pany can  make  a  better  showing  than  this,  the  stock  presents  little 
attraction  as  a  solid  investment. 

As  for  the  $120,000,000  of  common,  it  has  the  distinction  of 
being  the  largest  amount  of  pure  water  shown  by  any  railway  in  the 
United  States.  At  no  time  in  the  company's  history  has  it  ever  had 
a  semblance  of  value  other  than  for  voting  purposes.  And  yet  this 
stock  sold  at  $36  per  share  in  1903  and  at  $42  per  share  in  1906. 
It  sold  as  low  as  $16  per  share  in  1903  and  in  April  of  1907  it  sold 
below  $20.  With  steadily  rising  costs  of  operation  and  proportion 
of  fixed  charges  the  stock  could  hardly  be  regarded  as  an  attractive 
speculation  even  at  the  latter  figures. 


TEXAS  AND  PACIFIC  RAILWAY 

The  Texas  &  Pacific  forms  a  part  of  the  Gould  Southwestern 
system  and  is  controlled  in  the  interest  of  and  operated  in  close 
association  with  the  Missouri  Pacific.  Its  lines  extend  from 
New  Orleans  to  Texarkana,  where  it  joins  the  lines  of  the  Iron 
Mountain,  and  thence  westerly  through  Fort  Worth  to  El  Paso, 
at  a  westernmost  point  of  Texas.  It  also  operates  in  close  as- 
sociation with  the  International  &  Great  Northern,  whose  lines 
extend  southwardly  from  Long  View  and  Fort  Worth  to  Gal- 
veston, and  to  Laredo  on  the  Mexican  border,  where  they  join 
the  lines  of  the  Mexican  National  Railroad. 

In  1906  the  Texas  &  Pacific  operated  1,848  miles  and  its  direc- 
torate was  made  up  entirely  in  the  Gould  interest,  comprising 
George  J.  Gould,  president,  Edwin,  Frank  and  Howard  Gould, 
Winslow  S.  Pierce,  etc. 

As  of  June  30th,  1906,  the  Missouri  Pacific  owned  $6,252,000 
of  the  stock,  and  practically  all  of  the  income  bonds,  save  those 
held  in  the  treasury,  were  owned  by  the  Iron  Mountain,  hav- 
ing been  exchanged  for  4%  collateral  Iron  Mountain  bonds  on 
a  basis  of  65%. 

The  company  was  organized  under  Act  of  Congress  in  1871, 
and  after  passing  into  hands  of  receivers  was  reorganized  with- 
out confirmation  of  the  foreclosure  sale  of  1887,  whereby  the 
original  federal  charter  was  preserved. 

Capitalization. 

As  of  January  1st,  1907,  the  capital  account  stood  as  follows: 

Common    stock $38,763,810 

Income    bonds 24,984,645 

Total    .•• $63,748,455 

(681) 


682  TEXAS  &  PACIFIC 

Funded    debt 29,516,936 

Equipment  bonds,  etc 1,010,901 

Total    capital $94,276,292 

Securities    held 647,597 


Approx.   net  capitalization $93,628,695 


Average  net  capital,  per  mile $50,664 

Miles    operated 1,848 

Net  earnings  on  net  capital 5.3% 

Stock  on  net  capital 67% 

Fixed  Charges  on  total  net  income 40% 

Factor   of   Safety 60% 

It  will  be  seen  that  with  gross  earnings  of  only  $8,000  per 
mile,  the  capitalization  of  $50,664  per  mile  was  very  high.  If, 
however,  the  income  bonds  be  included  as  a  part  of  the  stock 
issues,  they  comprised  a  full  two-thirds  of  the  gross  capitaliza- 
tion, and  on  the  $38,763,810  of  common  stock  no  dividends  have 
ever  been  paid. 

In  1906  the  net  earnings  showed  the  fairly  respectable 
figure  of  5.3%  on  the  uet  capitalization,  but  this  was  an  excep- 
tional year,  and  that  of  previous  years  was  much  lower. 

Excluding  the  interest  paid  on  the  income  bonds,  the  fixed 
i- barges  for  1906  consumed  only  40%  of  the  total  net  earnings, 
K-aving  a  very  solid  margin  of  safety  for  the  underlying  securi- 
ties. The  full  5%  interest  on  the  income  bonds  consumed  only 
20%  more,  leaving  a  margin  of  safety  for  these  bonds  of  40%. 

The  securities  held  by  the  Texas  &  Pacific  were  chiefly 
its  own  bonds,  and  of  no  especial  interest. 

The  company  was  very  heavily  over-capitalized  from  the 
beginning,  but  since  1900  there  has  been  practically  no  increase 
in  the  stock  and  bond  issues,  save  about  one  million  of  equipment 
bonds,  etc.,  and  in  the  meantime  the  income  has  considerably 
increased,  so  that  the  company  has  been  slowly  growing  up  to 
its  capitalization.  Considerable  sums  have  been  turned  back 
from  earnings  into  improvements  of  the  property. 

The  following  table  exhibits  the  mileage  and  earnings  of 
the  road  for  a  series  of  years : 


TEXAS  &  PACIFIC 


683 


Year 


1896 
1897 
1898 
L899 
1900 
1901 
1902 
1903 
1904 
1905 
1906 


Miles  Operated 

Gross„Earnings 

Per  Mile 

1,499 

$6,825,145 

$4,453 

1,499 

7,588,549 

5,062 

1,499 

8,006,503 

5,341 

1,492 

8,300,185 

5,563 

1,527 

9,751,121 

6,385 

1,634 

11,769,942 

7,203 

1,697 

11,236,601 

6,621 

1,727 

12,094,744 

7,003 

1,826 

12,433,147 

6,809 

1,826 

12,130,391 

6,643 

1,848 

14,914,607 

8,110 

It  will  be  seen  that  with  no  great  increase  in  mileage,  the 
earnings  have  nearly  doubled  in  ten  years,  and  since  1900,  with 
practically  no  increase  of  capitalization,  have  increased  more 
than  50%.  This  is  an  excellent  showing.  The  traffic  of  the 
road  is  largely  agricultural,  cotton  shipments  being  a  consider- 
able factor. 

Maintenance. 

The  following  table  exhibits  the  traffic  density  and  main- 
tenance charges  over  a  period  of  seven  years : 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900 

438,845 
540,242 
435,146 
484,576 
401,301 
445,948 
520,124 

$988 
1,103 
919 
879 
730 
706 
824 

$735 
852 
831 
808 
752 
750 
994 

$1,723 

1901 

1,955 

1902 

1,750 

1903 

1,687 

1904 

1,482 

1905 

1906 

1,456 
1,818 

Average 

466,599 

$878 

$817 

$1,695 

It  will  be  seen  that  the  maintenance  charges  were  rather 
low,  even  for  a  prairie  road  with  the  traffic  density  of  the  Texas 
&  Pacific.  Still  they  compare  favorably  with  those  of  other  roads 
in  this  section.  It  will  be  noted  that  the  traffic  density  is  rather 
variable  and  that  it  was  higher  in  1901  than  in  any  subsequent 
year.  The  charges  for  1906  were  about  in  keeping  with  the  gen- 
eral charges  for  the  period  under  view. 

In  addition,  however,  to  the  ordinary  maintenance  charges, 
considerable  sums  have  been  set  aside  from  the  surplus  for  im- 
provements, as  follows : 


1900. 
1901. 


$655,307 
926,351 


684 


TEXAS  &  PACIFIC 


1902 2,207,358 

1903 841,385 

1904 1,272,233 

1905 1,128,118 

1906 1,518,574 


Surplus  Earnings. 

Before  the  payment  of  the  interest  on  the  income  bonds  and 
before  charging  oft  the  sums  included  in  the  table  above,  the 
surplus  has  shown  as  follows: 


Year 


Surplus 


Per  cent. 

Paid  on 

Income 

Bonds 


Per  cent. 

Earned  on 

Common 

Stock 


1900 $1,792,585  1* 

1901 2,413,329  4 

1902 1,881,744    i  5 

1903 1,780,107  5 

1904 2,430,973  5 

1905 I  2,010,796  5 

1906 |  3,082,619  5 


1. 

3. 

1 

1, 

3. 

2. 

4.8 


.0 
.3 


Average 
Price. 

Calendar 
Years 

20 
36 
45 
32 
29 
35 
35 


The  Balance  Sheet. 

As  of  June  30th,  1906,  there  were : 

Current  Assets  of $3,382,744 

Current    Liabilities   of 6,561,387 


Leaving  a  debit  balance  of $3,178,643 

Included  in  the  current  assets  were : 

Bills   Payable $4,450,200 

Vouchers    unpaid 1,081,924 

The  item  of  cash  amounted  to  only  $552,467.  It  will  be 
seen,  therefore,  that  the  finances  of  the  company  were  not  in 
good  shape,  and  that  an  issue  of  bonds  or  notes  would  be  re- 
quired to  provide  the  road  with  working  funds. 

The  credit  balance  of  the  income  account  was  $1,570,712, 
the  larger  part  of  which  would  be  required  for  the  payment  of 
the  5%  interest  on  the  income  bonds  for  the  year. 

Investment  Value. 

It  will  be  seen  from  the  table  of  surplus  earnings  that  in  the 
seven  years  there  shown,  there  have  been  funds  ample  for  the 
payment  of  the  full  5%  on  income  bonds  and  the  full  amount  has 


TEXAS  &  PACIFIC  685 

been  paid  from  1902.  Previous  to  that,  4%  was  paid  in  1901  and 
ly2%  in  1900.  These  bonds  being  almost  entirely  held  in  the 
Iron  Mountain  treasury,  the  matter  was  of  interest  only  to  the 
stockholders  of  the  Iron  Mountain  road. 

Above  the  payments  on  the  income  bonds,  a  small  percent- 
age has  been  earned  in  each  year  on  the  common  stock,  the  ex- 
ceptional year  of  1906  showing  4.8%.  On  account,  however,  of 
the  heavy  capitalization  of  the  company,  practically  all  of  this 
surplus  was  required  for  the  improvement  of  the  road;  and  the 
further  fact  that  the  company  in  1906  was  in  need  of  working 
funds  rendered  the  prospect  of  dividends  on  the  stock  rather 
vague. 

It  will  be  further  noted  that  the  mileage  earnings  were 
higher  in  1901  than  in  any  subsequent  year  up  to  1906.  In  other 
words,  the  road  has  not  shared  to  any  large  extent  in  the  tre- 
mendous prosperity  of  the  period.  Competition  is  becoming 
very  much  keener,  owing  to  the  entry  of  the  Rock  Island  system 
(the  Frisco  line)  into  New  Orleans  and  the  construction  of  the 
various  other  new  lines  in  Texas.  Unless,  therefore,  earnings 
should  increase  much  more  rapidly  than  they  have,  the  stock 
seems  more  likely  to  fluctuate  within  somewhat  the  same  limits 
as  in  the  four  or  five  years  preceding.  It  sold  up  as  high  as  $54 
in  1902,  under  the  exceptional  showing  of  that  year,  declining  as 
low  as  $20  in  1903  and  1904.  It  sold  up  to  $41  in  1905,  declining 
in  the  slump  of  March,  1907,  to  $25. 

Earning  no  dividend,  the  stock  is  expensive  to  carry  and 
should  the  high  rates  of  1906-7  continue,  it  is  probable  that  the 
stock  would  decline  to  even  lower  figures  than  1904.  Purchased 
at  very  low  prices  it  might  show  a  considerable  profit  to  holders 
who  are  content  to  wait,  but  there  are  other  non-dividend  stocks 
on  the  list  of  roads  showing  a  much  more  vigorous  management 
and  larger  prospects,  which  would  likely  exhibit  much  greater 
powers  of  recovery  from  any  extensive  recession  of  prices. 


TOLEDO  AND  OHIO  CENTRAL  RAILWAY. 

The  Toledo  and  Ohio  Central  is  practically  a  part  of  the  Hock- 
ing Valley  system.  Ninety-nine  per  cent,  of  its  stock  is  owned  by 
the  Hocking  Valley,  and  its  directors  and  operating  officers  are 
largely  the  same,  though  it  is  operated  separately. 

It  is  chiefly  a  coal  road,  running  from  the  Ohio  River  to 
Toledo,  through  central  Ohio,  and  extending  under  trackage  rights 
into  West  Virginia.  It  operates  a  total  of  441  miles.  The  line  rep- 
resents the  reorganization,  in  1885,  of  the  old  Ohio  Central.  In  1901 
the  Hocking  Valley  acquired  all  but  a  few  shares  of  both  common 
and  preferred  stock,  exchanging  on  a  basis  of  70%  of  the  Hocking- 
Valley  stock  of  the  same  class.  It  guarantees  the  principal  and 
interest  of  the  Kanawha  and  Michigan  first  mortgage  bonds,  $2,- 
469,000,  and,  jointly  with  the  Hocking  Valley,  the  Kanawha  and 
Hocking  Valley  Coal  and  Coke  Company's  bonds,  $3,000,000,  and 
those  of  the  Continental  Coal  Company,  $2,750,000. 

Seven  of  the  ten  directors  are  also  directors  of  the  Hocking- 
Valley,  the  remaining  three  being  Decatur  Axtell,  vice-president  of 
the  Chesapeake  and  Ohio  Railroad ;  F.  D.  Underwood,  president  of 
the  Erie  Railroad ;  and  Horace  Andrews,  largely  interested  in  street 
railways  in  Cleveland,  Ohio.  In  1906  the  chairman  of  the  board 
was  Decatur  Axtell ;  the  president  is  N.  Monsarrat,  president  of  the 
Hocking  Valley. 

Capitalization. 

On  June  30th,  1906,  the  capital  account  stood  as  follows : 

Common  stock   (outstanding) $5,852,100 

Preferred  stock 3,708,000 

Total   stock $9,560,100 

Bonded    debt 9,680,182 

Nominal    capital $19,240,282 

Securities   held 2,569,766 

Approx.   net   capitalization $16,670,516 

(686) 


TOLEDO  &  OHIO  CENTRAL 

Approx.  net  capital,  per  mile $37,800 

Average   miles  operated 441 

Net  earnings  on  net  capitalization 6.8% 

Stock  on  net  capitalization 57% 

Fixed  charges  on  total  net  income 36% 

Factor  of   Safety 74% 


687 


The  company  formerly  held  a  controlling  interest  in  the  Kana- 
wha and  Michigan  Railroad,  but  with  the  plan  for  consolidating  the 
latter  with  the  Hocking  Valley,  this  stock  turned  up  in  the  treasury 
of  the  latter  road. 

The  capitalization  of  the  road  has  not  increased  in  a  number 
of  years. 

Of  the  gross  earnings,  coal  operations  produce  considerably 
more  than  one-half  of  the  total,  other  freight  earnings  about  one- 
quarter,  and  passenger  earnings  a  half  of  the  latter.  The  mileage 
of  the  road  has  increased  only  through  a  slight  addition  of  trackage 
rights,  and  meanwhile,  the  earnings  per  mile  have  risen  from  $6,500 
to  $9,233,  an  increase  of  nearly  50%. 

Maintenance. 

The  maintenance  has  apparently  been  very  liberal,  the  various 
items  through  a  series  of  years  standing  as  follows : 


Traffic  Density 

Maintenance  per  Mile 

Total 

Year 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

1,117,594 
1,262,552 
1,457,388 
1,420,627 
1,527,034 
1,755,351 

$930 
1,004 
1,241 
1,199 
1,410 
1,566 

$1,194 
1,490 
1,389 
1,462 
1,598 
1,691 

$2,124 
2,494 
2,630 
2,661 
3,008 
3,257 

Average 

1,423,424 

$1,225 

$  1,471 

$2,696 

Hocking  Val . . 
Tol  St.  L.  &  W 

2,778,318 
1,046,139 

1,739 
996 

3,131 
959 

4,870 
1,955 

In  addition  to  the  $1,436,000  appropriated  in  1906  for  mainte- 
nance, a  further  sum  of  $312,809  was  set  aside  for  additions  and 
improvements. 

Surplus  Earnings. 
The  surplus  earnings  shown  since  1901  were  as  follows: 


688  TOLEDO  &  OHIO  CENTRAL 

1900-1 $210,356 

1901-2 139,605 

1902-3 325,425 

1903-4 431,300 

1904-5 368,402 

1905-6 553,926 

Dividends  on  the  preferred  were  paid  from  1890  to  1896,  and 
on  the  common  from  1891  to  1893,  when  they  were  suspended,  and 
no  dividends  have  been  paid  since. 

The  surplus  shown  for  1906,  including  appropriations  for  ad- 
ditions was  equivalent  to  S%  on  the  preferred,  and  6.3%  on  the 
common  stock.  The  net  surplus,  after  charging  off  these  sums, 
would  have  paid  the  4%  preferred  dividends,  and  left  a  small  mar- 
gin for  the  common.  The  Hocking  Valley's  equity  in  the  undis- 
tributed earnings,  after  charging  off  improvements,  amounted  in 
1906  to  about  $240,000. 

The  balance  sheet  for  1906  showed  that  the  company  was  in 
need  of  working  capital.  "Working  assets"  amounted  to  $898,725, 
the  working  liabilities  to  $1,258,100,  leaving  a  debit  balance  of 
$359,375. 


TOLEDO,  ST.  LOUIS  AND  WESTERN 

RAILROAD. 

The  Toledo,  St.  Louis  and  Western — the  "Clover  Leaf"  as 
it  is  more  familiarly  known — operates  a  single-track  road  from 
Toledo  to  St.  Louis  in  an  almost  direct  line.  It  does  not  touch 
any  of  the  larger  points  such  as  Indianapolis,  and  is  dependent 
chiefly  for  its  prosperity  on  its  traffic  arrangements  with  the 
Grand  Trunk  Railway.  With  the  latter  it  jointly  owns  the  De- 
troit and  Toledo  Shore  Line  Company,  which  gives  the  Clover 
Leaf  direct  access  to  Detroit,  and  practically  increases  its  length 
by  sixty  miles. 

The  entire  amount  of  stock  is  lodged  with  a  voting  trust 
consisting  of  F.  P.  Olcott,  Thomas  H.  Hubbard  and  William  A. 
Read,  who  have  power  to  sell  the  stock  subject  to  the  approval  of 
the  majority  of  the  amount  of  each  class  of  trust  certificates 
issued  against  the  stock.  The  road  has  been  reported  sold  first 
to  the  Vanderbilts  and  then  to  the  Erie ;  then  in  connection 
with  the  contemplated  reorganization  of  the  Cincinnati,  Hamil- 
ton and  Dayton. 

The  road  is  a  reorganization  in  1900  of  the  Toledo,  St.  Louis, 
and  Kansas  City,  which  property  was  sold  under  foreclosure  in 
that  year.  The  latter  in  turn  was  a  reorganization  in  1886  of  the 
Toledo,  Cincinnati  and  St.  Louis  which  went  into  the  hands  of 
a  receiver  in  1893  after  default  of  its  interest  payments.  The 
line  operates  directly  451  miles  of  road.  The  Detroit  and  Toledo 
Shore  line,  owned  jointly  with  the  Grand  Trunk,  is  not  include  1 
in  its  operations.  The  Clover  Leaf  is  sometimes  classed  as  one 
of  the  roads  of  the  "Hawley  Group,"  and  its  ownership  is  very 
much  the  same  as  that  of  the  Minneapolis  and  St.  Louis,  the 
Colorado  Southern,  etc. 

The  directorate  includes  William  A.  Read,  chairman,  of  W. 
A.  Read  and  Company,  bankers.  New  York;  also  a  director  in 
the  Chicago  Great  Western,  the  Chicago,   Indianapolis  and   Louis- 

44  ff>8^ 


690  TOLEDO,  ST.  LOUIS  &  WESTERN 

ville,  the  Interborough,  etc. ;  Theodore  P.  Shonts,  president  and 
general  manager,  also  a  director  in  the  Iowa  Central  and  chair- 
man of  the  Panama  Canal  Commission;  Thomas  H.  Hubbard, 
vice-president,  also  a  director  in  the  Wabash,  vice-president  of 
the  Chattanooga  Southern,  president  of  the  Guatemala  Central, 
chairman  of  the  board  of  the  International  Banking  Corporation, 
etc. ;  Edwin  Hawley,  president  of  the  Minneapolis  and  St.  Louis, 
etc.;  Henry  E.  Huntington,  largely  interested  in  traction  syndi- 
cates in  southern  California,  also  a  director  in  the  Minneapolis 
and  St.  Louis,  Iowa  Central,  etc. ;  John  Crosby  Brown,  formerly 
president  of  the  Newburg,  Dutchess  and  Connecticut  recently 
absorbed  by  the  New  Haven  road,  and  up  to  1906  a  director  in 
the  Wisconsin  Central;  Hugo  Blumenthal,  a  director  of  the 
United  Copper  Company;  John  J.  Emery,  vice-president  of  the 
Dayton  and  Michigan,  a  director  in  the  American  Light  and 
Traction  Company,  Colorado  Southern,  etc. ;  C.  S.  W.  Packard, 
of  Philadelphia ;  Charles  H.  Tweed,  of  New  York,  also  a  director 
in  the  National  of  Mexico;  and  James  N.  Wallace,  pres.  ;u 
of  the  Central  Trust  Company,  New  York,  also  a  director  in  the 
National  of  Mexico.  Messrs.  Hawley,  Tweed  and  Huntington 
were  formerly  associated  on  the  board  of  the  Southern  Pacific. 

F.  P.  Olcott,  who  with  Messrs.  Hubbard  and  Read  consti- 
tuted the  voting  trust,  is  president  of  the  Central  Trust  Company, 
and  was  formerly  a  director  in  the  Clover  Leaf,  Colorado  South- 
ern, etc. 

The  so-called  Hawley  Group  of  roads  is  in  three  sections 
which  do  not  join,  and  the  most  important  affiliation  with  the 
Clover  Leaf  is  with  the  Grand  Trunk  which  affords  it  a  direct 
outlet  to  the  east. 

Capitalization. 

As  of  June  30th,  1906,  the  capital  account  of  the  road  stood 
as  follows : 

Common    stock $10,000,000 

Preferred    stock 10,000,000 

Total  stock $20,000,000 

Funded   Debt    (net) 16,050,000 

Total    capital $36,050,000 


TOLEDO,  ST.  LOUIS  &  WESTERN  691 

Approximate  capital  per  mile $79,933 

Average  miles  operated 451 

Net   earnings   on   capital 3.3% 

Stock   on   net   capitalization 55% 

Fixed  Charges  on  Total  Net  Income 61% 

Factor   of   Safety 39% 

The  amount  of  funded  debt  shown  is  after  deducting  $450.- 
000  of  prior  lien  bonds  held  in  the  treasury. 

It  will  be  seen  that  the  nominal  capitalization  is  high  com- 
pared with  its  earnings,  but  more  than  half  of  this  capitalization 
is  represented  by  stock  upon  which  no  dividends  had  ever  been 
paid  until  1907,  when  preferred  dividends  were  begun.  The  Clover 
Leaf's  figure  of  $79,933  per  mile  is  higher  even  than  that  of  the 
over-capitalized  Wabash  which  was  only  $69,170  per  mile. 

The  fact  of  over-capitalization  is  further  reflected  in  the 
showing  on  net  earnings  on  capital,  which  amounted  to  only 
3.3%  in  the  highly  prosperous  year  of  1906.  This  compares  with 
the  figure  of  3.7%  for  the  Wabash  and  with  a  minimum  of  6%  or 
7%  on  successful  roads  over  the  country  generally.  The  propor- 
tion of  Total  Net  Income  consumed  by  Fixed  Charges  is  neither 
low  nor  very  high,  and  leaves  a  margin  of  safety  of  about  40% 
for  the  underlying  securities. 

A  very  notable  fact  about  the  history  of  the  road  is  that  its 
capitalization  has  increased  but  slightly  since  the  reorganization 
in  1900 — only  about  half  a  million  dollars  in  bonds— while  the 
gross  earnings  have  more  than  doubled.  This  is  a  very  strong 
showing,  and  were  it  continued,  the  road  would  soon  be  able 
comfortably  to  pay   dividends  on  its  preferred  stock. 

Aside  from  its  ownership  of  a  half  interest  in  the  Detroit 
and  Toledo  Shore  Line,  the  road  has  no  equities  in  other 
companies. 

Character  of  Traffic. 

The    Clover    Leaf    is    essentially    a    freight    road,    its    freight 
earnings  amounting  to  about  80%  on  the  gn>^.     Passengers  rep 
resent  only  about  13%.     The  freight  tonnage  is  widely  distrib- 
uted, the  largest  single  item  being  that  of  anthracite  coal  which 
amounts   to  only   20%   of   the  total.     Farm    products,   agricultun 
etc.,  divide  the  balance  evenly. 


692 


TOLEDO,  ST.  LOUIS  &  WESTERN 
Stability  of  Earnings. 


The  following  table  shows  the  earnings  of  the  road  for  the 
last  year  of  the  receivership  and  the  seven  years  of  the  reorgan- 
ized company.  It  will  be  seen  that  the  earnings  fell  rather  sharply 
from  the  last  full  year  of  the  receivership,  but  from  1900  they 
have  steadily  gained.  The  mileage  has  remained  the  same  while 
the  mileage  earnings  have  risen  from  $4,302  in  1900  to  $9,329  in 
1906,  a  gain  of  115%. 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1897-8 

451 

451 
451 
451 
451 
451 
451 
451 

$2,245,974 

$4,983 

1898-9 

1899-0 

1,940,378 
2,490,566 
2,640,880 
3,111,358 
3,341,648 
3,785,165 
4,205,051 

4,302 

1900-1 

5,525 

1901-2 

5,859 

1902-3 

6,903 

1903-4 

7,414 

1904-5 

8,398 

1905-6 

9,329 

Maintenance. 


It  will  be  seen  from  the  following  table  that  the  traffic 
density  has  very  nearly  doubled  since  1901,  and  about  the  same 
is  true  of  the  gross  earnings  from  the  same  year.  Obviously 
therefore  the  road  was  receiving  about  the  same  average  rates 
as  in  1901.     Maintenance  charges  have  shown  as  follows: 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way            Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

773,934 
793,538 
1,024,212 
1,000,405 
1,189,109 
1,495,636 

$803 

807 

982 

1,016 

1,135 

1,237 

$710 
757 

1,010 
981 

1,057 

1,237 

$1,513 
1,564 
1,992 
1,997 
2,192 
2,474 

Average 

1,046,139 

$996 

$959 

$1,955 

Wabash 

Lake  E.&  West 
Tol.  &  O.  Cen. 
Vandalia* 

880,032 

592,307 

1,423,424 

910,426 

1,332 

999 

1,225 

1,184 

1,370 

733 

1,471 

1,693 

2,702 
1,732 
2,696 

°,877 

*  Average  for  1904  and  1905. 

It  will  be  seen  that  maintenance  of  way  has  risen  a  little 
over  50%,  ami  maintenance  of  equipment  about  70%.  Compared 
with  other  roads  in   the  same  territory,  it  will  be  seen   that  the 


TOLEDO,  ST.  LOUIS  &  WESTERN 


693 


Clover  Leaf's  maintenance  charges  have  averaged  considerably 
lower.  The  average  traffic  density  of  the  Wabash,  for  example, 
is  considerably  less  for  the  six  years  under  view,  while  its  main- 
tenance  charges  have  averaged  $650  per  mile  higher.  Similarly, 
Lake  Erie  and  Western,  with  only  a  little  more  than  half  the 
traffic  density  has  spent  nearly  as  much  in  Lliesc  six  years 
for  the  upkeep  of  its  road.  Compared  with  the  Toledo  and  Ohio 
Central,  the  maintenance  standard  has  been  about  the  same ; 
but  compared  with  the  Vandalia  for  the  two  years  that  the  con- 
solidated Vandalia  has  been  in  operation,  it  will  be  seen  that  the 
Clover  Leaf's  standard  was  more  than  $500  per  mile  lower. 
Gauging  the  Clover  Leaf  therefore  with  its  competitors,  its 
expenditures  for  maintenance  have  not  been  excessive. 

Aside  from  its  maintenance  charges  the  Clover  Leaf  has  not 
made  any  specific  appropriations  for  improvements  from  earn- 
ings, as  is  the  general  practice  of  prosperous  lines. 

Surplus  Earnings. 

The  surplus  shown  on  the  basis  of  the  maintenance  charges 
noted  above  have  been  as  follows  for  the  six  years : 


Year 

Surplus 

Per  cent. 
Earned  on 
Preferred 

Average 

Price 
Preferred 

1900-1 

$82,555 
55,690 
171,639 
223,944 
238,976 
490,573 

.8 
.5 
1.7 
2.2 
2.3 
4.7 

34 

1901-2 

44 

1902-3 

36 

1903-4. . 

54 

1904-5. .                

58 

1905-6 

52 

The  gain  in  surplus  in  the  six  years  under  view  has 
amounted  to  nearly  500%  and  the  surplus  in  1906  was  sufficient 
to  pay  the  full  4%  dividend  on  the  preferred.  This  was  after 
more  liberal  maintenance  by  nearly  $300  per  mile  than  in  any  pre- 
vious year,  but  it  is  to  be  noted  that  in  this  same  year  of  1906, 
the  traffic  density  increased  nearly  25%,  while  at  the  same  time 
maintenance  charges  increased  only  about  15%. 

The  Balance  Sheet. 


Excluding  materials  and  supplies,  the  balance  sheet  at  the 
close  of  the  fiscal  year  of  1906  showed : 


694  TOLEDO,  ST.  LOUIS  &  WESTERN 

Current    assets $759,927 

Current  liabilities 720,120 

Leaving  a  working  balance  of $39,807 

There  was  cash  in  hand  to  the  amount  of  $221,475,  and  the 
surplus  to  credit  of  profit  and  loss  was  $1,178,765. 

Investment  Value. 

The  preferred  stock  of  the  Clover  Leaf  is  entitled  to  non- 
cn mutative  dividends  of  4%.  The  provision  as  to  the  common 
is  that  after  the  4%  has  been  paid  on  the  preferred,  any  further 
dividends  for  that  year  shall  go  to  the  common  stock. 

In  March,  1907,  an  initial  semi-annual  dividend  of  2%  was 
declared,  with  fair  prospects  of  a  continuance  of  this  dividend  should 
the  business  of  the  road  continue  equally  favorable.  On  this  basis 
the  stock  was  readily  worth  above  $50  per  share  and  its  average 
price  in  1906  was  about  the  latter  figure. 

But  the  investor  in  Clover  Leaf  probably  thinks  more  of  the 
possibility  of  a  sale  of  the  road  to  one  of  the  larger  lines  and  what 
the  road  might  bring.  Were  the  net  earnings  of  1906  (very 
nearly  $1,200,000)  capitalized  on  a  5%  basis,  this  would  give  a 
valuation  of  very  nearly  $25,000,000  to  the  road,  which  after  de- 
ducting $16,000,000  of  bonds,  would  leave  a  valuation  of  nearly 
$9,000,000  for  the  $10,000,000  each  of  preferred  and  common 
stock.  It  is  highly  probable  that  a  road  which  has  shown  the 
steady  advance  in  earnings  that  the  Clover  Leaf  has,  would 
readily  sell  on  this  basis,  and  it  was  indeed  reported  that  the 
road  had  been  sold  to  the  Vanderbilts  for  $25,000,000. 

The  consent  of  a  majority  of  both  classes  of  stockholders 
would  be  necessary  to  the  sale,  and  the  basis  of  the  division 
would  be  necessarily  determined  among  the  shareholders  them- 
selves. In  1906  the  certificates  for  the  preferred  ranged  between 
$43  and  $60  per  share,  and  for  the  common  between  $25  and  $40 
per  share. 

Were  these  quotations  made  the  basis  of  a  division  and  were 
the  road  sold  on  the  basis  assumed,  the  preferred  shareholders 
would  receive  about  $56  per  share,  and  the  common  about  $34 
per  share.  Whether  the  preferred  shareholders  with  a  fairly 
good  prospect  of  full  dividends  on  their  stock  would  sell  on  this 
basis  is  quite  another  question.     It  is  not  improbable  that  the 


TOLEDO,  ST.  LOUIS  &  WESTERN  695 

basis  of  the  division  would  be  determined  by  the  amount  of 
common  stock  held  by  the  interests  holding  a  majority  of  the 
preferred. 

Possibly  it  is  due  to  the  peculiarity  which  obtains  that  the 
preferred  stock  has  not  sold  as  high  on  the  average  as  its  condi- 
tion and  its  prospects  seem  fairly  to  justify.  The  outside  investor 
will  probably  conclude  that  the  preferred  is  hardly  worth  less 
than  $50  per  share,  and  that  at  anything  like  this  figure,  if  bought 
and  held,  it  should  in  the  course  of  time  show  a  profit. 

As  to  the  common,  it  is  a  pure  speculation.  In  1903  it  sold 
as  low  as  $15  per  share.  In  the  meantime,  the  surplus  shown 
has  considerably  more  than  doubled.  If  it  could  sell  down  to 
$25  per  share  in  1906,  on  any  very  general  recession  in  prices  it 
might  go  lower;  and  if  on  the  other  hand  it  could  be  run  up  to 
$40  a  share  as  in  1906,  it  ought  to  show  a  handsome  profit  if  pur- 
chased at  a  low  figure  and  the  road  met  with  no  unexpected 
reverses. 


UNION  PACIFIC  SYSTEM 

Union  Pacific  Railroad,  Oregon  Shortline,  Oregon  Rail- 
road CSl,  Navigation. 

From  a  rather  formidable  wreck  in  1897,  the  Union  Pacific  has 
within  a  very  few  years  become  one  of  the  richest,  most  aggressive 
and  formidable  of  American  railway  companies.  This  has  largely 
been  due  to  the  administrative  genius  revealed  by  its  president,  K. 
H.  Harriman,  who,  up  to  the  time  that  he  became  chairman  of  the 
executive  committee  of  the  reorganized  company  in  1898,  had  taken 
no  very  striking  part  in  railway  management. 

The  Union  Pacific  "system"  of  today  combines  about  5,400 
miles  of  railroad,  including  the  main  line  of  the  Union  Pacific,  ex- 
tending from  Kansas  City  and  Omaha  to  Ogden  in  Utah ;  the  Ore- 
gon Shortline  and  Utah  Northern,  the  Oregon  Railroad  &  Navi- 
gation and  several  subsidiaries.  In  addition  to  this,  it  owns  what 
amounts  practically  to  a  controlling  interest  in  the  Southern  Pa- 
cific, operating  over  9,000  miles  of  main  track ;  which  brings  up  the 
total  of  what  is  commonly  known  as  the  "Harriman  system"  to  an 
aggregate  of  about  15,000  miles  of  road.  It  has  also  a  half  interest 
in  the  San  Pedro,  Los  Angeles  and  Salt  Lake,  generally  known, 
from  its  builder,  as  "Senator  Clark's  road." 

Beyond  this,  the  Union  Pacific  has  large  holdings  in  the  North- 
ern Pacific,  the  Great  Northern,  the  Chicago  &  Alton,  New  York 
Central,  etc.  It  has  a  large  block  of  Atchison,  and  still  more  is  sup- 
posed to  be  held  by  friendly  interests ;  and  in  1906  it  acquired  half  of 
tlu-  Pennsylvania  Railroad's  holdings  in  the  Baltimore  &  Ohio;  like- 
wise, in  1906.  interests  friendly  to  the  Harriman  combination  suc- 
ceeded in  obtaining  a  majority  of  the  board  of  the  Illinois  Central, 
ousting  President  Fish  and  substituting  an  executive  for  that  road 
presumably  friendly  to  the  Union  Pacific. 

If  the  assumption  be  made,  though  there  is  no  public  evidence 
for  this,  that  the  Harriman  interests  are  dominant  in  Baltimore  & 
Ohio,  this  brings  the  total  of  mileage  controlled  by  these  interests 
up  to  about  25,000  miles.     In  addition,  the  Southern  Pacific  owns 

(696) 


UNION  PACIFIC  697 

control  of  the  Pacific  Mail  Steamship  Company,  and  likewise  of  an 
important  line  of  steamers  between  New  Orleans  and  New  York. 
All  this  is  the  work  of  about  eight  years. 

History. 

The  Union  Pacific  has  had  as  interesting  and  checkered  a 
career  as  any  American  railroad.  With  the  discovery  of  gold  in 
California  and  the  rush  of  emigration  to  that  state,  the  need  of  a 
transcontinental  line  was  very  soon  felt;  but  the  difficulties  in  build- 
ing a  railroad  across  the  Rocky  Mountains  were  tremendous,  and 
the  project  was  delayed  for  some  years.  The  demand  for  such  .1 
line  became  acute,  however,  with  the  outbreak  of  the  Civil  War, 
and  about  1862  bills  were  passed  through  Congress  looking  to  the 
construction  of  the  line.  In  1864  the  Government  offered  heavy 
subsidies  to  a  construction  company,  and  under  the  direction  of  Gen. 
Grenville  M.  Dodge  the  work  of  building  was  begun.  The  Union 
Pacific  was  completed  through  to  Ogden  in  1869,  there  joining  the 
Central  Pacific,  which  had  been  constructed  eastward  from  San 
Francisco,  thereby  affording  a  through  line  from  the  Missouri  River 
to  the  Pacific. 

In  1880,  the  Kansas  Pacific,  running  from  Kansas  City  to 
Denver,  and  the  Denver  Pacific,  from  Denver  to  Cheyenne,  were 
absorbed,  and  a  little  later  the  Oregon  Shortline,  the  Utah  Northern 
and  the  Oregon  Railway  &  Navigation  were  added.  This  brought 
the  total  mileage  of  the  system  up  to  about  8,100  miles.  The  Cen- 
tral Branch,  from  Kansas  City  to  Pueblo,  was  leased  to  the  Mis- 
souri Pacific,  so  that  the  actual  operated  mileage  of  the  system  in 
1892,  was  about  7,672  miles. 

The  subsidies  granted  by  the  Government  amounted  to  12,600 
acres  for  every  mile  of  road  completed,  and  in  addition  it  advanced 
from  $16,000  to  $48,000  per  mile  in  bonds,  according  to  the  char- 
acter of  the  country  through  which  the  road  ran.  Although  subse- 
quently these  advances  were  made  only  a  second  lien  on  the  prop- 
erty, and  though  the  interest  on  these  bonds  was  paid  by  the  Gov- 
ernment, the  load  was  heavy  and  steadily  increasing.  An  enormous 
debt  had  been  piled  up  in  scandalous  fashion,  and  dating  from  about 
1890  the  company  found  itself  in  serious  difficulties.  In  1893  the 
road  was  thrown  into  hands  of  receivers,  more  to  force  a  settlement 
with  the  Government,  as  many  felt,  than  from  actual  necessity.  The 
Government  refused  to  lift  its  lien  and  various  efforts  at  reorgani- 


698  UNION  PACIFIC 

zation  failed.  But  in  1898  the  efforts  of  the  reorganization  com- 
mittee were  successful  and  the  new  company  took  possession  of  the 
road,  after  paying  the  main  government  obligations  in  full,  with 
interest. 

At  the  head  of  the  new  company  were  Jacob  H.  Schiff  and  Otto 
H .  Kahn  of  the  private  banking  firm  of  Kuhn,  Loeb  &  Co. ;  the 
Gould  interests  were  represented  by  George  J.  Gould  and  Winslow 
S.  Pierce,  the  Standard  Oil  interests  by  James  Stillman,  President 
of  the  National  City  Bank,  the  Vanderbilt  interests  by  President 
Marvin  Hughitt,  the  Equitable  Insurance  Company  by  Henry  B. 
Hyde,  its  President  and  Gen.  Louis  Fitzgerald. 

Horace  G.  Burt  was  chosen  President,  Winslow  S.  Pierce. 
Chairman  of  the  Board,  and  E.  H.  Harriman,  Chairman  of  the  Ex- 
ecutive Committee.  Mr.  Harriman  very  soon  became  the  domi- 
nating spirit  of  the  road ;  the  new  management  met  the  returning 
tide  of  prosperity  with  prompt  energy,  and  very  soon  the  income 
of  the  company  warranted  the  great  work  of  reconstruction  which 
was  begun  in  1899.  Although  this  involved  the  rebuilding  of 
but  a  comparatively  short  portion  of  the  line,  it  required  something 
like  $20,000,000  before  it  was  completed. 

The  chief  part  of  this  reconstruction  was  the  straightening  out 
and  levelling  of  the  line  through  the  mountains,  with  the  elimination 
of  heavy  curves  and  grades.  There  is  a  current  impression  that  the 
Union  Pacific  had  been  built  in  a  cork-screw  fashion  in  the  en- 
deavor to  increase  the  subsidies  as  largely  as  possible.  It  is  of  in- 
terest therefore,  to  know  that  out  of  more  than  a  thousand  miles 
of  main  line  the  reconstruction  involved  only  about  thirty,  and  both 
President  Harriman  and  his  chief  engineer,  Mr.  Berry,  paid  high 
tribute  to  the  resource  and  skill  with  which  Gen.  Dodge  had  met 
and  overcome  the  almost  insuperable  difficulties  which  faced  him. 
Moreover,  in  the  work  of  rebuilding,  the  engineer  followed  more  or 
less  the  original  line  as  laid  out  by  Gen.  Dodge,  portions  of  which  he 
had  been  compelled  to  abandon  on  account  of  the  enormous  expendi- 
ture involved. 

The  effect  of  rebuilding  was  to  reduce  the  gradient  to  a  maxi- 
mum of  41  feet  per  mile,  and  to  provide  the  Union  Pacific  with  the 
most  feasible  route  through  that  portion  of  the  country  which  could 
be  found.  Subsequently  the  same  aggressive  policy  of  reconstruc- 
tion was  applied  to  the  Central  Pacific  line  extending  from  Ogden 
to  San  Francisco.  This  work  required  among  other  things  the 
building  of  the  celebrated  Lucin  cut-off,  carrying  the  road  on  piling 


UNION  PACIFIC  699 

30  miles  across  an  arm  of  the  Great   Salt   Lake,  one  of  the  most 
remarkable  engineering   feats  in  American  railroading. 

Of  the  old  Union  Pacific  system  about  5,800  miles  were  finall\ 
acquired  by  the  new  company,  including  eventually  the  Oregon 
Shortline,  the  Oregon  Railroad  &  Navigation,  etc.,  affording  a 
through  line  from  Kansas  City  and  Omaha  to  Portland,  Oregon. 
The  other  portions  of  the  system,  the  Denver  &  Gulf,  the  Leadville 
&  Gunnison,  etc.,  were  left  to  be  subsequently  reorganized  as  the 
Colorado  &  Southern.  Later  some  portions  of  the  road  southward 
from  the  Salt  Lake  were  sold  to  the  San  Pedro  road,  partly  in  re- 
turn for  a  half  interest  in  that  property,  leaving  a  total  of  about 
5,400  miles. 

By  1901  the  Union  Pacific  determined  upon  the  purchase  of  the 
Central  Pacific,  then  owned  by  the  Southern  Pacific,  or  failing  that, 
the  construction  of  a  new  line  from  Ogden  to  San  Francisco.  The 
death  of  Mr.  Huntington,  the  controlling  spirit  of  the  Southern 
Pacific,  left  the  way  open  for  the  purchase  of  practically  a  controll- 
ing interest  in  that  road  and  the  construction  of  a  new  line  was 
abandoned.  The  acquisition  of  the  Southern  Pacific,  together  with 
a  half  interest  in  the  San  Pedro  line  gave  the  Union  Pacific  practi- 
cal monopoly  over  an  enormous  territory  and  this  domination  was 
accentuated  by  the  purchase,  as  it  is  generally  understood,  of  so 
large  a  block  of  Atchison  stock  that  no  rival  interests  could  readily 
obtain  a  controlling  interest  in  that  road. 

In  1901  it  was  announced  that  Hill-Morgan  interests,  controll- 
ing the  Great  Northern  and  Northern  Pacific,  had  purchased  a  ma- 
jority interest  in  the  Burlington.  '  As  the  Burlington  came  in  direct 
competition  with  the  Union  Pacific,  this  was  accounted  an  invasion 
of  the  Union  Pacific's  territory;  the  Harriman  interests  retaliated 
by  endeavoring  to  secure  control  of  the  Northern  Pacific.  They 
succeeded  in  obtaining  a  clear  majority  of  the  stock  of  that  road  but 
not  of  the  common,  and  were  defeated  by  a  proviso  in  the  North- 
ern Pacific's  articles  that  the  preferred  stock  might  at  any  time  be 
retired  at  par.  This  the  Hill-Morgan  interests  determined  to  do, 
at  the  same  time  making  enormous  purchases  of  stock  in  the  market. 
The  result  of  this  was  the  Stock  Exchange  panic  of  1901,  when 
Northern  Pacific  shares  rose  as  high  as  $800  and  $1,000. 

In  the  subsequent  formation  of  the  Northern  Securities  Com- 
pany, the  Union  Pacific's  shares  were  deposited  along  with  the 
others  and  when  this  huge  combination  was  dissolved  by  order  of 
the  courts,  the  Union  Pacific  received  back,  not  its  original  North- 


TOO  UNION  PACIFIC 

era  Pacific  shares,  but  a  pro  rata  of  its  Northern  Securities  hold- 
ings in  shares  of  the  Great  Northern  as  well  as  the  Northern  Pa- 
cific. Owing  to  the  tremendous  rise  in  the  value  of  these  shares 
the  Union  Pacific's  net  profits  from  this  transaction,  taking  what 
shares  remained  unsold  on  June  30th,  1906,  at  the  then  prevailing 
prices,  and  assuming  that  the  balance  had  been  sold  at  something 
like  the  same  figures,  were  in  the  neighborhood  of  from  seventy  to 
eighty  million  dollars. 

This  immense  sum,  combined  with  the  equally  heavy  rise  in  the 
Southern  Pacific  shares  and  in  its  own  earnings,  put  the  Union  Pa- 
cific in  a  position  of  almost  unparalleled  financial  strength,  leaving 
it  at  the  close  of  the  fiscal  year  of  1906  with  the  largest  cash  surplus 
in  its  treasury  ever  shown  by  any  railroad  in  the  world. 

The  territory  served  by  the  Union  Pacific  lines  has  more  than 
shared  in  the  general  recovery  of  business  from  the  period  of  1893 
and  1896,  Colorado  and  other  states  being  especially  benefited  by 
the  development  of  the  gold  mining  industry  which  has  taken  place 
in  this  period.  Equally  notable  have  been  the  results  on  the  appli- 
cation of  more  scientific  methods  to  agriculture,  the  introduction 
of  top-soiling  on  the  Western  plains  and  irrigation  into  the  more 
rainless  districts.  The  result  of  this  has  been  to  place  these  Western 
states  in  a  position  of  far  greater  financial  solidity  than  they  ever 
before  enjoyed. 

Ownership. 

For  some  time  after  the  reorganization,  the  Union  Pacific  was 
familiarly  known  as  the  Kuhn-Loeb  road,  but  with  the  increased 
ascendency  of  Mr.  Harriman  in  its  affairs,  this  distinction  has  been 
dropped  and  Mr.  Harriman  is  understood,  practically  speaking,  to 
be  in  almost  absolute  control  of  its  affairs.  Jacob  H.  Schiff.  head 
of  Kuhn,  Loeb  &  Co.,  and  Otto  H.  Kahn.  his  partner,  have  retired 
from  the  directorate  of  the  Union  Pacific  as  they  have  from  the 
directorate  of  all  other  roads,  but  without,  it  is  understood,  re- 
linquishing their  large  interests  in  Union  Pacific. 

The  determination  of  the  Gould  lines  to  construct  the  Western 
Pacific  brought  about  a  rupture  between  the  Gould  and  Harriman 
interests,  with  the  consequent  retirement  of  the  Gould  representa- 
tives from  the  board. 

At  the  close  of  the  fiscal  year  1906  the  Union  Pacific's  director- 
ate was  made  up  as  follows : 


UNION  PACIFIC  *  701 

E.  H.  Harriman,  president ;  Wm.  D.  Cornish,  vice-president ; 
Robert  S.  Lovett,  counsel ;  A.  J.  Earling,  pres.  of  the  Milwaukee  & 
St.  Paul ;  H.  H.  Rogers,  one  of  the  three  controlling  directors  of  that 
road;  Wm.  G.  Rockefeller,  son  of  Wm.  Rockefeller,  and  James  Still- 
man,  pres.  of  the  National  City  Bank,  representing  the  Standard  Oil 
interests;  Chas.  A.  Peabody,  pres.  of  the  Mutual  Life  Insurance  Co. 
and  attorney  for  the  Astor  estate,  also  associated  with  Mr.  Harriman 
in  affairs  of  the  Illinois  Central ;  Henry  C.  Frick,  a  director  in  and 
understood  to  be  one  of  the  controlling  spirits  of  the  Atchison ; 
also  interested  in  Reading,  Norfolk  &  Western,  etc. ;  Robert 
Goelet,  who  also  sided  with  Mr.  Harriman  in  the  Illinois  Central 
fight;  Marvin  Hughitt,  President  of  the  North  Western;  David 
VVillcox,  former  president  of  the  Delaware  &  Hudson ;  Oliver  Ames, 
Boston;  P.  A.  Valentine,  Chicago,  and  Joseph  F.  Smith,  Salt  Lake 
City,  one  of  the  heads  of  the  Mormon  Church. 

The  executive  committee  was  made  up  of  Messrs.  Harriman, 
Frick,  Stillman,  Hughitt  and  Lovett,  the  most  notable  change  dur- 
ing the  year  being  the  entry  of  Mr.  H.  C.  Frick  into  this  controlling 
committee.  It  was  this  executive  committee  which  suddenly  jumped 
the  Union  Pacific's  dividend  from  6%  to  10%  in  August,  1906. 

The  Union  Pacific  reports  the  fourth  largest  number  of  stock- 
holders of  any  road  in  x\merica,  the  three  preceding  being  in  order, 
the  Pennsylvania,  the  Canadian  Pacific  and  the  Atchison.  In  1905 
the  number  of  record  was  14,256. 

As  the  Union  Pacific  owns  practically  all  of  the  stock  of  the 
( )regon  Shortline  and  the  Oregon  Railroad  &  Navigation,  the  di- 
rectorate of  these  two  companies  is  almost  the  same  as  that  of  the 
1'arent  road.  The  executive  committee  of  the  Oregon  Shortline  is 
made  up  of  President  Harriman.  Vice-President  Wm.  D.  Cornish, 
K.  S.  Lovett,  counsel,  Oliver  Ames,  W.  V.  S.  Thorne  and  P.  A. 
Valentine. 

The  executive  committee  of  the  Oregon  Railroad  &  Navigation 
is  made  up  of  Messrs.  Harriman,  Cornish,  Lovett,  Wm.  L.  Bull, 
former  President  of  the  Wisconsin  Central ;  Maxwell  Evarts,  attor- 
ney for  Union  Pacific,  and  William  Mahl,  of  New  York,  comptroller 
of  the  Union  Pacific  lines. 

Affiliations. 

Despite  its  large  holdings  in  the  Northern  Pacific  and  Great 
Northern,  the  Union  Pacific  has  no  representatives  on  the  boards 


702  UNION  PACIFIC 

of  these  two  roads.  Neither  has  it  any  direct  representative  on  the 
Atchison,  but  H.  H.  Rogers  is  a  member  of  the  Atchison  executive 
committee  and  H.  C.  Frick  is  also  a  director.  Victor  Morawetz,  the 
chairman  of  the  executive  committee,  is  also  a  director  in  the  Nor- 
folk &  Western  with  Mr.  Frick. 

Mr.  Harriman's  success  in  ousting  Stuyvesant  Fish  from  the 
presidency  of  the  Illinois  Central  was  taken  to  mean  that  thence- 
forth the  Harriman  interests  would  more  or  less  dominate  this  road 
as  well.  Three  of  the  Illinois  Central  directors,  Chas.  A.  Peabod} . 
President  of  the  Mutual  Life  Insurance  Co.  and  now  very  closely 
associated  with  Mr.  Harriman,  Robert  W.  Goelet  and  Mr.  Harri- 
man, are  also  on  the  Union  Pacific  Board,  and  enough  of  the  other 
directors  sided  with  Mr.  Harriman  to  elect  a  Harriman  man  president 
of  the  road.  The  Illinois  Central  joins  the  Union  Pacific  at  Omaha, 
affording  a  fairly  direct  through  line  to  Chicago,  and  it  likewise 
meets  the  lines  of  the  Southern  Pacific  at  New  Orleans  in  a  very 
convenient  way,  and  control  of  the  road  amply  compensates  for  the 
loss  of  the  Chicago  &  Alton  to  the  Rock  Island. 

The  Union  Pacific  owns  about  one-quarter  of  the  stock  of  the 
Chicago  &  Alton  and  up  to  1906  its  representatives  were  in  control 
of  that  road  and  Mr.  Harriman  was  chairman  of  the  executive  com- 
mittee. In  this  year  control  of  the  Alton  definitely  passed  to  the 
Rock  Island  interests. 

The  Union  Pacific  works  in  close  association  with  both  the 
St.  Paul  and  Northwestern  and  four  of  the  Union  Pacific  directors 
are  on  the  Northwestern  board,  including  Messrs.  Frick,  Stillman, 
Ames  and  Hughitt. 

Aside  from  the  directorates  indicated,  Mr.  Harriman  is  on  the 
Erie  board  and  a  member  of  its  executive  committee.  Mr.  Harri 
man  is  likewise  President  of  the  Pacific  Mail,  and  the  Union  Pacific, 
through  its  ownership  of  the  Southern  Pacific,  dominates  the  affairs- 
of  that  company,  operating  a  large  line  of  steamers  from  San  Fran- 
cisco to  Panama  and  to  the  Orient.  With  the  opening  of  the 
Panama  Canal,  it  is  probable  that  the  Pacific  Mail,  in  conjunction 
with  the  Southern  Pacific's  steamship  line  on  the  Atlantic,  will  take 
a  prominent  part  in  transportation  via  that  route. 

Edward  H.  Harriman,  president,  was  born  on  Long  Island  in 
1848  and  became  a  broker  on  the  New  York  Stock  Exchange ;  was 
earliest  interested  in  the  Sodus  Point  Railroad,  sold  in  1884  to  the 
Pennsylvania;  was  made  a  director  in  the  Illinois  Central  in  1883 
and   Vice-President  in   1887,  and  in  the  absence  of  President    Fish 


UNION  PACIFIC  703 

was  for  a  time  acting  president.  For  a  time  a  small  road  bought  for 
the  Illinois  Central  was  operated  in  his  name  personally;  he  was  a 
member  of  the  first  board  of  the  reorganized  Union  Pacific  Railroad 
and  made  chairman  of  the  executive  committee  May  23rd,  1898, 
serving  continuously  since;  was  for  a  brief  period  in  1889  president 
of  the  reorganized  Chicago  &  Alton,  and  subsequently  for  several 
years  chairman  of  the  executive  committee  of  the  Kansas  City 
Southern;  he  became  president  of  the  Southern  Pacific  in  1902  and 
of  the  Union  Pacific  in  1904.  He  is  understood  to  be  largely  inter- 
ested in  the  St.  Joseph  &  Grand  Island,  is  a  director  of  the  Wells 
Fargo  Express  Co.  and  practically  in  control ;  also  director  in  the 
Western  Union  Telegraph  Co.,  etc.,  etc. 

Capitalization. 

Practically  all  the  stock  of  the  Oregon  Shortline  and  the  Ore- 
gon Railroad  &  Navigation  have  been  exchanged  for  Union  Pacific 
shares,  so  that  in  all  save  name,  the  three  companies  are  one  and 
are  so  treated  in  the  reports  of  the  road. 

Disregarding  the  stocks  of  the  two  subsidiary  companies  held 
in  the  Union  Pacific's  treasury,  the  capitalization  of  the  system 
June  30,  1906,  stood  as  follows : 

Common    stock $195,446,900 

Preferred    stock 99,544,100 

Auxiliary   Cos 38,080 

Total    stock $295,029,080 

Funded  debt.  Union  Pacific 100,581,000 

Oregon  Shortline.  etc 79,472,000 

Oregon   RR.   &  Nav 21,479,000 

Total  capital $496,561,080 

Securities    held 96.781,806 

Approx.  net  capital $399,779,274 

Approximate  net  capital,  per  mile $73,992 

Average  miles  operated 5,403 

Net  earnings  on  net  capital 8% 

Stock  on  net  capitalization 73% 

Fixed  charges  on  total  net  income....  33% 

Factor  of  safety 67% 


704  UNION  PACIFIC 

It  should  be  understood  that  in  the  makeup  of  the  above  tabu- 
lation, the  value  of  the  securities  held  is  taken  at  their  book  cost 
and  not  at  their  market  valuation.  The  latter  was  above  $200,- 
000,000,  so  that  if  the  market  value  of  these  securities  were  deducted 
from  the  gross  capitalization  of  the  road,  this  would  bring  the 
approximate  net  capital  down  to  below  $300,000,000,  instead  of 
$400,000,000.  In  other  words,  it  would  reduce  the  estimated  capi- 
talization per  mile  by  a  full  25%. 

Still  further,  the  books  of  the  Union  Pacific  at  the  close  of  the 
fiscal  year  of  1906  showed  cash  and  demand  loans  to  the  amount 
of  $55,000,000,  payments  on  account  of  the  San  Pedro  line  of  $17,- 
300,000,  and  other  advances  which  would  easily  reduce  the  net  capi- 
talization of  the  Union  Pacific  (leaving  ample  working  funds)  to  not 
much  more  than  $200,000,000. 

For  the  purpose  of  comparison  with  other  roads,  therefore,  the 
estimate  of  capital  per  mile  for  the  Union  Pacific  would  be  less 
than  $50,000.  This  would  compare  with  $59,512  for  the  Northern 
Pacific,  something  like  $42,362  for  the  Great  Northern,  $28,613  for 
the  Canadian  Pacific.  $58,887  for  the  Atchison,  and  $64,426  for  the 
Southern  Pacific. 

Nominally,  on  the  estimated  capitalization  shown  above,  the  net 
earnings  for  1906  showed  8%.  But  if  the  actual  net  capital  were 
figured  at  say  $250,000,000,  the  net  earnings  for  1906  were  above 
12.5%-  This  figure  would  then  compare  with  9.6%  for  the  Northern 
Pacific,  about  10.1%  for  the  Great  Northern,  9.4%  for  the  Canadian 
Pacific,  5.9%  for  the  Atchison  and  6.6%  for  the  Southern  Pacific.  It 
will  be  seen,  therefore,  that,  mainly  in  consequence  of  its  speculative 
adventure  in  the  stocks  of  other  roads,  especially  the  Southern  Pa- 
cific and  Northern  Pacific,  the  actual  net  capitalization  of  the  Union 
Pacific  is  lower  than  that  of  any  other  of  the  Pacific  roads  save  the 
Canadian  line,  and  for  that  matter  lower  than  that  of  any  other 
great  railway  system  in  the  country  with  similar  earnings. 

In  the  same  way,  if  we  take  the  net  capitalization  at  $250.- 
000,000.  about  four-fifths  of  this  capital  would  be  represented  by 
stock.  In  other  words,  cash  and  securities  would  more  than  wipe  out 
all  the  outstanding  funded  debt  of  the  system.  The  extraordinary 
financial  strength  of  the  Union  Pacific  is  further  evidenced  in  the 
fact  that  fixed  charges  in  1906  consume  only  about  33%  of  the 
total  net  income,  leaving  a  nominal  factor  of  safety  on  its  under- 
lying securities  of  67%. 


UNION  PACIFIC  705 

This  showing  is  to  some  extent  affected  by  the  fact  that  in  the 
income  for  the  fiscal  year  of  1906,  the  report  included  dividends 
of  $2,250,000  received  from  the  common  stock  of  the  Southern 
Pacific,  which  was  not  declared  until  after  the  close  of  the  fiscal 
year  and  not  payable  until  October  1st.  There  would  have  been  no 
thought  of  thus  anticipating  the  dividends  of  the  Northern  Pacific 
or  any  other  outside  company,  and  it  is  not  clear  why  it  should  have 
been  in  the  case  of  the  Southern  Pacific.  However,  the  elimination 
of  this  item  would  reduce  the  total  net  income  of  the  system  for  the 
year  by  less  than  8%,  so  that  this  would  affect  the  estimate  of  the 
factor  of  safety  but  little. 

Equities   Owned. 

The  chief  outside  holding  of  the  Union  Pacific  is  $90,000,000 
par  value  of  the  common  stock  and  $18,000,000  par  value  of  the 
preferred  stock  of  the  Southern  Pacific,  constituting  about  40%  of 
the  total  stock.  The  Southern  Pacific  in  1906  showed  fixed  charges 
consuming  only  50%  of  the  total  net  income  and  after  the  payment 
of  the  full  7%  on  the  preferred  stock,  the  surplus  amounted  to 
about  10%  on  the  $197,000,000  of  common  stock.  This  left  a  wide 
margin  of  safety  for  the  preferred.  The  preferred  is  redeemable  at 
115  and  therefore  its  value  cannot  greatly  exceed  this  figure. 

On  the  other  hand,  the  road  was  heavily  charged,  as  for  many 
years  previously,  for  maintenance,  so  that  the  surplus  showing  was 
conservative  rather  than  otherwise.  On  a  5%  basis,  with  such  a 
showing,  Southern  Pacific  common  should  be  worth  well  around 
oar.  so  that  the  aggregate  of  the  Union  Pacific's  holdings  of  this 
stock  would  be  worth  in  normal  times  above  $110,000,000,  or  con- 
siderably in  excess  of  the  amount  at  which  all  the  Union  Pacific's 
securities  are  carried  on  its  books.  This  valuation  of  the  Union 
Pacific's  stock  would  represent  a  profit  to  the  Union  Pacific  perhaps 
in  excess  of  $40,000,000  above  the  original  cost. 

The  next  largest  of  Union  Pacific's  holdings  was  $15,436,400, 
par  value  of  Great  Northern  stock,  obtained  with  the  dissolution  of 
the  Northern  Securities  Company.  If  this  stock  were  taken  at  the 
average  price  of  Great  Northern  through  1906,  before  the  distri- 
bution of  the  ore  certificates,  this  stock  would  have  been  valued  at 
above  $45,000,000. 

Similarly,  if  its  $13,350,800  par  value  of  the  Northern  Pacific 
were  taken  at  the  average  price  of  that  stock  throughout  1906  up 

45 


706  UNION  PACIFIC 

to  the  time  of  its  new  issue  of  stock,  this  item  would  represent  a 
further  value  of  above  $27,000,000. 

The  Union  Pacific  held  on  June  30,  1906,  preferred  stock  in 
the  Chicago  &  Alton  to  a  par  value  of  $10,343,100,  worth  in  the 
market  about  three-fourths  of  this  sum,  or  around  $3,000,00.  Other 
large  holdings  were  $8,750,000  par  value,  representing  seven-eighths 
of  the  capital  stock  of  the  Occidental  &  Oriental  Steamship  Co.,  $2,- 
400,000  par  value  of  the  Pacific  Express  Co.,  $5,000,000  par  value 
of  the  Union  Pacific  Coal  Co.  (the  entire  issue)  and  bonds  of  other 
companies  of  a  par  value  of  $18,849,200.  Taking  the  bonds  at 
somewhere  near  par,  we  should  then  have  a  valuation  of  the  Union 
Pacific's  securities  as  follows: 

Southern  Pacific,  Preferred .  $20,000,000 

Southern  Pacific,  Common 90,000,000 

Great  Northern 45,000,000 

Northern  Pacific 27,000,000 

Chicago  &  Alton 8,000,000 

San  Pedro  Line,  advances 17,300,000 

Other  stocks    (est.) 10,000,000 

Bonds 18,000,000 

Total   $235,300,000 

These  securities  were  carried  on  the  books  at  their  net  cost 
of  $96,781,806,  plus  $17,300,000  advanced  to  the  San  Pedro  line. 

During  the  year,  the  Union  Pacific  sold  off  Great  Northern, 
Northern  Pacific  and  Northern  Securities  stock  of  an  approximate 
market  valuation  (price  obtained  not  stated)  of  between  $60,000,000 
and  $70,000,000.  As  the  entire  cost  of  the  Northern  Pacific's  stock. 
bought  by  the  Union  Pacific  in  1901,  could  not  have  been  very 
greatly  in  excess  of  this  sum,  the  entire  remaining  stock,  to  an 
approximate  market  value  of  about  $75,000,000.  represented  very 
nearly  that  much  clear  profit  as  the  result  of  this  Napoleonic  specu- 
lation. Combining  the  profit  from  the  purchase  of  the  Southern 
Pacific  with  this  figure,  it  will  be  seen  that  the  Union  Pacific  had 
gained  in  stock  ventures  in  excess  of  $100,000,000,  equivalent  to 
50%  or  60%  of  the  entire  amount  of  Union  Pacific  stock  outstand 
ing.  This  is  railroading  a  la  mode,  and  it  was  largely  this  which  has 
made  the  Union  Pacific  financially  the  strongest  railway  organization 
in  the  United  States. 


UNION  PACIFIC  707 

In  the  fall  of  1906  it  was  announced  that  the  Union  Pacific 
had  purchased  from  Kuhn,  Loeb  &  Co.  about  one-half  of  the  Penn- 
sylvania's interest  in  the  Baltimore  &  Ohio,  and  from  the  Interstate 
Commerce  Commission's  investigation  in  the  following  winter,  it 
appeared  that  other  very  heavy  purchases  had  been  made.  The  par 
value  and  cost  of  these  purchases  was  as  follows : 

Par  Value.  Cost. 

Illinois   Central $18,623,100        $32,618,883 

Railroad  Securities  Co 5,313,800            8,823,144 

St.  Joseph  &  Grand  Island 5,082,200            2,022,540 

Fresno  City  Railway  Company 495,650                106,410 

Pacific  Fruit  Express  Co 1,200,000 

(10%     subscription    to    $12,000,000 

par  value) 

Atchison  10,000,000          10,395,000 

Baltimore  &  Ohio 43,200,600          48,445,709 

( 10%   subscription  to   18,450  shares 

pfd.  and  9,225  shares  common 276,750 

Chicago  &  Northwestern 2,572,000             5,303,673 

New   York   Central 14,285,745           19,634,324 

Northern   Pacific 124,580 

(5%    subscription   to    24,916    shares 

capital  stock) 
Total  cost,  not  including  unpaid  subscriptions $128,641,018 

These  purchases  were  generally  at  the  prevailing  high  prices 
of  1906  and  in  the  heavy  slump  in  security  values,  culminating  in 
the  stock  panic  of  March,  1907,  the  Union  Pacific's  purchases 
showed,  with  the  rest,  a  heavy  decline  in  value,  amounting,  at  the 
lowest  prices,  to  approximately  $25,000,000,  or  about  20%  on  the 
one  hundred  and  twenty-eight  millions  which  the  stocks  cost. 

This  was  a  heavy  fall  and  revealed  clearly  enough  the  diffi- 
culties and  dangers  which  beset  the  large  holding  companies.  Their 
purchases  may  show  large  losses  as  well  as  large  gains,  but  it  is  to  be 
noted,  as  the  result  of  these  purchases,  and  the  corresponding  sale 
of  Northern  Pacific  and  Great  Northern  securities,  the  Union  Paci- 
fic's item  of  "other  income"  would  show,  if  taken  for  a  full  year,  an 
increase  of  around  two  and  one-half  million  dollars.  In  other  words, 
ihe  Union  Pacific  sold  off  high-priced  stocks  on  which  the  yield  was 
relatively  low  and  by  re-investing  the  money  so  obtained,  very  con 
siderably  augmented  its  total  net  income. 

It  is  to  be  noted  further  that  the  prices  reached  in  March  of 
1907  were  really  very  low  prices,  as  compared  with  the  yield,  since 
in  general  a  standard  list  of  railway  stocks  showed  a  higher  interest 


708  UNION  PACIFIC 

return  at  these  prices  than  at  any  time  since  the  panic  year  of  '93, 
and  were  actually  at  the  same  level  as  at  the  lowest  of  that  year. 
Barring,  therefore,  anything  short  of  a  prolonged  business  depres- 
sion, it  would  appear  that  the  loss  shown  on  the  Union  Pacific's 
investments  was  largely  a  paper  loss,  and  that  while  some  of  the 
purchases  may  have  been  at  exceptionally  high  prices,  the  effect  of 
these  purchases  was  substantially  to  increase  the  income  of  the  road. 

The  Railroad  Securities  Company,  included  in  the  table  given 
above,  is  a  holding  company,  owning  $9,500,000  par  value  of  Illinois 
Central  stock,  so  that  combining  the  Union  Pacific's  purchases,  it 
would  appear  that  it  had  control  of  approximately  $28,000,000  of 
Illinois  Central  stock,  or,  roughly,  about  one-third  of  the  total. 

The  purchase  of  Baltimore  &  Ohio  stock  amounted  to  only 
about  12%  of  the  total  capital  stock  outstanding.  But  this  purchase 
was  looked  upon  as  indicating  an  intention  on  the  part  of  the  Union 
Pacific,  or  at  least  of  the  Harriman-Kuhn,  Loeb  interests,  to  form  a 
complete  transcontinental  chain  from  the  Atlantic  to  the  Pacific. 
Control  of  the  Baltimore  &  Ohio  would  of  course  mean  a  half  in- 
terest in  the  control  of  the  Reading,  likewise  the  Central  Railroad 
of  New  Jersey.  Mr.  Harriman  had  been  a  director  in  the  Baltimore 
&  Ohio  since  it  was  taken  from  the  hands  of  the  receivers,  and  a 
member  of  the  expenditures  committee,  which  laid  out  $30,000,- 
000  in  the  rebuilding  of  the  road.  It  was  moreover  noted  that  the 
Baltimore  &  Ohio  closely  parallels  a  large  part  of  the  eastern  Gould 
lines,  the  Western  Maryland-Wheeling  &  Lake  Erie- Wabash  system, 
and  that  it  was  precisely  with  the  Gould  lines,  on  account  of  the 
building  of  the  Western  Pacific,  parallelling  the  Central  Pacific, 
that  the  Harriman  lines  found  themselves  most  at  war.  If  the 
Union  Pacific  interests  are  able  to  dominate  the  Illinois  Central, 
this  would  afford  the  connecting  link  both  between  the  Baltimore  & 
Ohio  and  the  eastern  terminals  of  both  the  Union  Pacific  and  South- 
ern Pacific.  But  whether  or  no  this  be  the  intent,  there  were  no 
changes  in  the  Baltimore  &  Ohio  board  in  the  ensuing  annual  elec- 
tion in  1906,  and  Mr.  Harriman  stood  then  as  the  only  direct  repre- 
sentative of  the  Union  Pacific  interest  in  the  directorate. 

All  told,  the  Union  Pacific  derived  from  its  investments  in 
other  companies  and  those  included  in  the  Union  Pacific  system  a 
total  in  1906  of  about  seven  and  one-half  million  dollars;  or  in- 
cluding rental  of  steamships,  etc.,  over  $R,000.000.  This  on  a  4% 
basis  would  affix  the  value  of  its  holdings  at  around  $200,000,000. 
As  a  matter  of  fact,  the   Union   Pacific   received  valuable   rights 


UNION  PACIFIC 


709 


during-  1905  from  the  Great  Northern  and  there  were  other  rights 
accruing  from  the  Great  Northern  and  Northern  Pacific  in  1906 
not  to  speak  of  the  Great  Northern's  distribution  of  Ore  Certifi- 
cates, so  that  the  Union  Pacific's  income  from  these  holdings  was 
in  realitv  considerably  larger.  Including  the  value  of  undistributed 
equities,  the  estimate  of  $200,000,000  as  a  valuation  of  the  Union 
Pacific's  outside  securities  would  hold  on  a  basis  even  better  than 
4%. 

While  the  company's  stock  market  speculations  have  been 
enormously  successful,  yet  taken  as  a  whole  the  interest  return  on 
the  investment  is  hardly  so  large  as  the  dividend  that  the  Union 
Pacific  pays  on  the  stock  issued  to  secure  capital  for  the  purchases. 
In  other  words,  with  the  exception  of  its  investment  in  Southern 
Pacific,  the  Union  Pacific  is  earning  much  more  from  the  capital 
invested  in  its  own  road  than  from  that  invested  outside. 

Increase  of  Capitalization. 

The  consolidation  of  the  present  Union  Pacific  system  had 
been  very  nearly  completed  by  1900,  so  that  the  main  changes  in 
the  capitalization  through  the  intervening  six  years  was  due  to  the 
conversion  of  the  $100,000,000  of  convertible  bonds  into  common 
stock  and  the  addition  of  about  $50,000,000  to  the  funded  debt. 
The  various  items  show  as  follows : 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 
Debt 

Total               Gross 
Capital           Earnings 

1900.... 
1906.... 

$95,645,000 
195,446,900 

$98,956,400  $149,473,000 
99,544,100     201,532,000 

$344,074,400 
496,523,300 

$38,308,420 
66,879,141 

Increase  over  six  years:    Total  capital,  44%;    gross  earnings,  74%. 

By  far  the  larger  part  of  this  increase  in  capital  was  employed 
in  the  purchase  of  the  Southern  Pacific,  Northern  Pacific  and  other 
stocks,  so  that  in  reality  the  actual  increase  of  capital  employed  in 
the  Union  Pacific  proper  has  been  very  slight,  probably  not  over 
15% ;  thus  the  comparison  between  increase  of  capital  and  in- 
crease of  earnings  becomes  very  much  more  notable  than  the  table 
would  indicate. 

In  1907,  the  funded  debt  was  increased  by  the  issue  of  $75,- 
000.000  4%  20-year  convertible  bonds,  redeemable  after  July  1. 
1912  at  102^2,  and  convertible  into  common  stock  at  any  time  up  to 
July  1,  1917  at  175.  Sold  at  below  90,  this  issue  netted  the  Union 
Pacific  about  $66,000,000. 


710  UNION  PACIFIC 

Character  of  Traffic. 

The  Union  Pacific's  very  full  reports  do  not  itemize  the  average 
tonnage.  It  may  be  taken  for  granted,  however,  that  a  very  con- 
siderable proportion  of  it  is  through  traffic,  since  the  average  dis- 
tance carried  for  each  ton  was  in  1906,  410  miles  and  the  average 
train  load  was  509  tons,  both  of  which  indicate  an  exceptionally 
long  haul.  The  Harriman  policy  has  not  been  apparently  the  build- 
ing of  a  great  man)-  small  feeders  and  the  development  of  local 
traffic,  with  concentration  upon  main  track. 

The  obvious  result  of  this  policy  would  be  to  make  the  Union 
Pacific  very  much  less  dependent  for  its  prosperity  upon  local  con- 
ditions. In  view  of  the  frequent  criticisms  of  this  policy,  it  is  to  be 
noted  that  there  is  perhaps  no  section  of  the  country  more  subject 
to  great  ups  and  downs  than  the  western  plains  which  the  Union 
Pacific  traverses.  While  this  territory  has  been  marvelously  pros- 
perous in  recent  years,  it  has  not  always  been  so  and  similar  periods 
of  adversity  may  come  again.  Buttressed  with  its  long  haul 
traffic,  the  Union  Pacific  is  in  a  much  stronger  position  to  meet 
such  a  contingency  than  it  otherwise  might  be. 

Passenger  traffic  in  1906  represented  a  little  under  20%  of  the 
gross  traffic  receipts.  The  gross  earnings  from  the  water  lines  were 
$4,402,400. 

Stability  of  Earnings. 

By  1891,  the  gross  earnings  of  the  Union  Pacific  system,  cover- 
ing then  nearly  7,700  miles  of  road,  reached  a  gross  of  $44,000,000. 
After  the  appointment  of  the  receivers  in  '93,  the  system  was 
practically  dismembered  so  that  comparisons  for  the  succeeding 
years  are  not  available.  What  the  slump  of  '93  meant,  however,  is 
sufficiently  evident  in  the  following  comparisons  of  the  earnings  of 
the  original  Union  Pacific  road.  This  was  the  1,800  miles  of  main 
track,  extending  from  Omaha  to  Ogden,  with  some  branches,  and 
was  the  main  line  of  the  system.  With  a  very  nearly  constant 
mileage,  the  earnings  from  1893  up  to  the  reorganization,  showed 
as  follows : 

1893 $19,743,748 

1894 15,263,912 

1895 14,958,537 

1896 14,083,348 

1897 14,944,477 

1898 17,384,017 


UNION  PACIFIC 


711 


Since  the  reorganization  the  earnings  of  the  m  stem,  including 
at  first  the  Oregon  Short  Line  and  eventually  the  Oregon  Railroad 
&  Navigation,  have  been  as  follows  (Rail  earnings  umy)  : 


Year 

Miles  Operated 

Gross  Earnings 

(Not  including 

water  lines) 

Per  Mile 

1898-9 

4,883 
5,427 
5,543 
5,711 
5,762 
5,353 
5,358 
5,403 

$33,647,032 
38,308,420 
42,688,835 
46,639,629 
50,216,248 
54,264,878 
58,756,845 
66,879,141 

$6,8£0 
5,058 

1899-0 

1900-1 

7,701 
8,166 
8,71b 

1901-2... 

1902-3.. 

1903-4 

10,137 
10,967 
12,376 

1904-5 

1905-6 

The  average  rates  received  by  the  Union  Pacific  in  1906  were 
considerably  higher  than  those  obtained  by  the  Northern  Pacific  and 
Great  Northern,  lower  than  those  of  the  Southern  Pacific,  and  about 
the  same  as  the  Atchison.  For  the  several  roads,  the  average  rates 
were : 

Southern  Pacific 1.02  cents 

Atchison   93 

Union  Pacific 91 

Northern  Pacific 83 

Great  Northern 79 

Canadian  Pacific 74 

It  will  be  seen  that  the  average  rate  on  the  Great  Northern,  for 
example,  was  13%  less  than  the  Union  Pacific,  or  actually  .12c.  less. 
This  average  rate  on  the  Union  Pacific's  total  freight  traffic  for  the 
year  would  mean  a  difference  in  its  gross  receipts  of  over  $6,000,000. 
Supposing  the  traffic  of  the  two  roads  more  or  less  equivalent,  this 
fact  may  be  read  in  two  ways,  either  that  if  less  prosperous  times 
were  to  force  a  reduction  in  freight  rates,  the  Great  Northern  is 
nearer  to  bedrock,  or  that  the  Union  Pacific  could  possibly  better 
stand  a  considerable  reduction  than  its  Northern  rival. 

It  is  to  be  noted  that  the  Union  Pacific's  earnings  per  mile  since 
1900,  since  which  time  the  mileage  has  but  little  changed,  have  risen 
steadily  and  rapidly,  reaching  in  1906  the  high  figure  of  over  $12,000 
per  mile.  This  is  more  than  double  1900,  the  first  year  of  the 
operations  of  the  system  as  it  stood  in  1906.  This  is  a  very  remark- 
able showing. 


712 


UNION  PACIFIC 


Maintenance. 

The  following  table  shows  the  amounts  appropriated  each  year 
for  the  up-keep  of  the  road  in  comparison  with  the  average  of  ths 
five  other  Pacific  lines,  and  also  the  Burlington.  The  traffic  density 
shown  for  the  first  year,  1901,  is  as  to  all  freight  carried,  the 
remaining  years  show  revenue  freight  only. 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

*527,806 
608,548 
650,899 
757,176 
899,992 
990,815 

$975 
1,041 
918 
1,213 
1,370 
1,519 

$805 
800 
1,045 
1,142 
1,285 
1,222 

$1,780 
1,841 
1,963 
2,355 
2,655 
2,741 

Average.  .  .  . 

739,206 

$1,173 

$1,049 

$2,222 

*  All  freight. 

Miles  extra  track,  168. 


Great  Nor 

650,321 

960 

594 

1,554 

729,102 

1,300 

791 

2,091 

Atchison 

557,005 

1,123 

1,113 

2,236 

Burlington. . 

580,024 

1,104 

1,032 

2,136 

458,589 

850 

1,002 

1,852 

So.  Pac 

594,898 

1,446 

1,246 

2,692 

It  is  doubtful  if  six  other  roads,  occupying  the  same  general 
territory,  and  with  more  or  less  of  the  same  character  of  traffic 
could  be  found  which  would  show  so  wide  a  discrepancy  in  main- 
tenance charges.  The  average  of  the  six  years  for  the  Union  Pacific 
is  nearly  $700  per  mile  annually  above  that  of  the  Great  Northern 
and  about  $470  below  that  of  the  Southern  Pacific.  With  an  average 
traffic  density  nearly  one-third  less,  the  annual  appropriations  of  the 
Atchison  and  the  Burlington  were  about  the  same  as  the  Union 
Pacific.  It  is  very  well  known  that  both  Burlington  and  Atchison 
have  for  a  number  of  years  charged  maintenance  very  heavily, 
while  the  Great  Northern's  charges  have  been  comparatively  light. 

Comparisons  for  the  year  of  1906  of  these  roads  are  of  es- 
pecial interest,  and  the  following  table  shows  the  same  items  for 
each  road  for  this  year: 


UNION  PACIFIC 


713 


Traffic  Density 

Way 

Equipment 

Total 

No.  Pac 

971,344 

$1,387 

$1,098 

$2,485 

Gt.  Nor 

835,342 

1,092 

816 

1,908 

Atchison 

693,873 

1,479 

1,271 

2,750 

Burlington 

713,568 

1,271 

1,533 

2,804 

So.  Pac 

678,554 

1,775 

1,554 

3,329 

Union  Pac. .  . . 

990,815 

1,519 

1,222 

2,741 

It  will  be  seen  that  in  1906  the  roads,  in  respect  to  maintenance, 
preserved  much  the  same  order  as  in  the  averages  for  six  years ; 
in  other  words  that  each  road  had  a  distinct  policy  in  this  regard  and 
followed  it  without  change.  Thus,  traffic  density  considered,  the 
Southern  Pacific's,  the  Atchison's  and  the  Burlington's  charges  were 
very  high  while  the  Great  Northern's  again  were  comparatively  low. 
Had,  for  example,  the  Union  Pacific  kept  its  books  in  the  same 
fashion  as  the  Great  Northern,  its  maintenance  charges  would  have 
been  perhaps  $500  per  mile  less  than  they  were,  which  on  5,400 
miles  of  rail  would  have  meant  a  difference  in  the  surplus  of  around 
$2,700,000.  Compared  with  the  Burlington  and  the  Atchison,  the 
difference  would  have  been  the  other  way,  though  not  to  the  same 
extent. 

It  is  evident  from  the  above,  that  the  Union  Pacific's  main- 
tenance charges  were  liberal  and  that  its  astonishing  surplus  was 
not  obtained  by  skimping  the  items  of  renovation. 

Improvements  from  Earnings. 


In  addition  to  these  liberal  charges,  the  Union  Pacific  has 
followed  the  general  example  of  successful  railways  in  setting 
aside  considerable  sums  annually  for  betterments.  These  appro- 
priations have  been  as  follows  : 

1900-1 $1,500,000 

1901-2 2,000,000 

1902-3 2,000,000 

1903-4 3,500,000 

1904-5 4,479,165 

1905-6 4,200,000 

Renewal     Fund     charged     to     Operating 

Expenses 2,206,610 

Total $19,885,775 


714 


UNION  PACIFIC 


This  aggregate  of  nearly  $20,000,000  compares  with  similar 
appropriations  of  $15,130,510  of  the  Great  Northern,  $20,102,165  by 
the  Northern  Pacific,  $15,859,500  by  the  Atchison,  none  whatever 
by  the  Burlington. 

Surplus  Earnings. 

After  the  liberal  maintenance  charges  shown  above,  but  before 
deducting  special  appropriations  for  betterments  the  Union  Pacific's 
surplus  from  1901  has  shown  as  follows: 


Year 

Surplus 

Dividends 

Paid  on 

Preferred 

Per  cent. 

Earned  on 

Common 

Dividends 

Paid  on 

Common 

Average 
Price  (Cal- 
endar year) 

1900-1.... 
1901-2. . . . 
1902-3. . . . 
1903-4. . . . 
1904-5.... 
1905-6. . . . 

$13,157,780 
14,501,594 
15,276,150 
16,596,548 
22,785,053 
33,971,283 

3* 

4 

4 

4 

4 

4 

9.6 
10.1 
10.4 
11.6 
11.3 
15.3 

3J 

4 
4 
4* 
8 

103 
103 
82 
92 
129 
167 

The  surplus  for  1906  includes  $2,206,680  set  aside  as  a  reserve 
fund  for  renewals  (included  in  operating  expenses)  and  likewise 
the  proceeds  from  the  2}4%  dividend  on  the  Southern  Pacific  com- 
mon stock  amounting  to  $2,250,000,  which,  however,  was  not  de- 
clared or  paid  until  after  the  close  of  the  fiscal  year.  Attention 
to  this  latter  bit  of  unusual  bookkeeping  has  already  been  drawn. 

Apropos  of  the  very  unexpected  increase  of  the  Union  Pacific's 
dividend  in  1906  from  a  6%  to  a  10%  rate,  it  is  of  interest  to  note 
that  in  1905  the  surplus  earned  on  the  common  stock  amounted  to 
about  11%,  while  the  dividend  for  the  fiscal  year  was  4^%,  while 
in  1906,  on  a  showing  of  about  15%  on  the  common  stock,  the  divi- 
dend for  the  year  was  actually  8%,  and  for  the  latter  half  of  the 
year  at  the  rate  of  10%. 

Dividend  Record. 


Dividends  on  the  old  Union  Pacific  Company  were  a  rather  un- 
certain affair,  though  6%  was  paid  in  1880  and  7%  in  1882  and  1883. 
However  with  1884,  they  ceased.  The  payments  by  the  reorganized 
company  have  been  as  follows : 


UNION  PACIFIC  715 

Common.       Preferred. 
Year.  %  % 

1898 \y2 

1899 iy2 

1900 3j/2  4 

1901-4 4  4 

1905 4y2  4 

1906 8  4 

The  Balance  Sheet. 

The  financial  status  of  the  Union  Pacific  at  the  close  of  the 
fiscal  year  1906  was  undoubtedly  the  most  remarkable  ever  shown 
by  an  American  railway,  and  for  that  matter  any  other.  There 
were — 

Current  assets  amounting  to $64,013,012 

Current  liabilities 20,419,100 

Leaving-  credit  balance  of $43,593,912 

In  addition  to  the  above  there  were  payments  on  account  of  the 
San  Pedro  line  of  $17,300,000,  advances  for  new  construction  $22,- 
836,611,  purchases  of  ocean  steamships  $5,126,796.  None  of  these 
items  contributed  to  the  revenues  for  the  year. 

The  actual  amount  of  assets  was  considerably  over  $100,000,- 
000,  offset  by  less  than  $25,000,000  of  current  liabilities.  The  figures 
are  so  enormous  as  almost  to  escape  appreciation.  It  is  quite  certain 
that  no  railway  in  America  ever  before  had  on  hand  practically 
$55,000,000. 

Investment  Value. 

If  in  1906,  the  Union  Pacific  could  have  sold  all  its  securities 
at  market  prices,  cashed  in  its  advances  to  other  lines  and  called  its 
loans — in  other  words,  reduced  itself  to  a  plain  simple  railway,  it 
would  have  had  on  hand  sufficient  to  retire  all  its  outstanding  bonds, 
and  its  preferred  stock,  and  had  left  ample  working  capital.  This 
would  have  left  it  with  5,400  miles  of  track,  earning  gross  upwards 
of  $12,000  per  mile  and  capitalized  at  a  little  less  than  $200,000,000. 
It  would  have  had,  above  operating  expenses  and  taxes,  including 
liberal  maintenance,  $30,000,000,  or  sufficient  to  pay  the  10%  divi- 
dend on  the  common  stock  and  have  left  $10,000,000  for  improve- 
ments and  reserve.  This  is  the  simplest  statement  that  can  be  made 
of  the  present  financial  strength  of  the  company. 


716  UNION  PACIFIC 

The  only  important  new  line  which  the  Union  Pacific  is  building 
is  that  from  Portland  to  Seattle,  affording  it  a  Northern  outlet  to 
Puget  Sound  shipping  where  it  was  previously  blocked.  Its  equity 
in  the  Southern  Pacific  is  likely  to  increase  in  value  rather  than 
diminish,  and  the  eight  years  of  the  reorganized  company  have 
shown  management  of  the  highest  efficiency  and  of  extraordinary 
foresight.  To  take  a  bankrupt  road  and  build  it  up  in  this  brief  time 
to  a  position  of  such  financial  strength  was  not  the  work  of  chance ; 
and  while  the  period  under  view  was  for  the  West  one  of  un- 
parallelled  prosperity,  there  seems  small  reason  to  suppose  that  a 
turn  of  tide  would  not  be  met  with  the  same  ability  and  foresight, 
but  the  company  is  in  a  position  to  retrench  expenditures  without 
crippling  the  efficiency  of  the  line. 

It  would  seem,  therefore,  that  nothing  short  of  a  general  busi- 
ness collapse  or  hostile  legislation,  arbitrarily  reducing  rates  to  an 
unprofitable  point,  would  impair  the  company's  ability  to  continue 
its  10%  dividend.  On  a  basis  as  solid  as  that  of  any  railroad  in 
the  country,  the  stock  should  therefore  sell  at  the  same  rate  as  other 
solid  dividend  stocks,  which  is  to  say,  that  if  the  prevailing  yield 
of  railway  shares  were  5%,  the  stock  should  average  around  $200. 
If  the  high  money  rates  were  to  decline,  and  stocks  sell  generally 
on  a  4%  basis,  Union  Pacific  would  be  worth  around  $250  per 
share. 

Against  this,  two  factors  might  militate  somewhat.  The  one  is 
that  with  less  prosperous  conditions,  a  10%  dividend  on  a  stock 
that  a  few  years  ago  was  to  be  picked  up  for  one-tenth  of  its 
present  value,  is  likely  to  stimulate  a  demand  for  a  heavy  reduction 
in  rates.  The  other  was  the  manner  in  which  the  dividend  of  1906 
was  declared.  Not  in  long  years  is  there  to  be  found  an  instance 
of  a  railroad  jumping  its  dividends  more  than  50%  at  a  stroke.  In 
the  summer  of  1906  some  increase  in  Union  Pacific's  dividend  was 
anticipated  but  so  little  was  the  advance  to  a  10%  basis  expected 
that  it  brought  forth  what  might  be  called  an  international  outcry 
of  astonishment.  Furthermore,  in  justifying  this  advance,  the 
management  stated  that  the  dividend  was  to  be  considered  as  equiva- 
lent to  6%  from  the  regular  earnings  and  4%  from  investments. 
To  do  this,  it  was  needful  to  include  the  proceeds  from  the  5% 
dividend  on  the  Southern  Pacific  common  stock  declared  after  the 
close  of  the  fiscal  year.     This  was  quite  an  unusual  procedure. 

It  was  a  very  natural  thought,  and  this  thought  very  freely 
expressed,  that  a  management  inclined  to  the  unexpected,  as  this 


UNION  PACIFIC  717 

dividend  certainly  was,  might  equally  produce  the  unexpected  in 
another  direction,  were  conditions  less  roseate. 

It  is  quite  possible  that  on  account  of  these  considerations, 
Union  Pacific  will  for  sometime  sell  rather  under  than  over  what 
earnings  and  conditions  would  amply  justify.  But  this  is  by  no 
means  certain,  on  account  of  the  tremendous  financial  strength 
of  the  controlling  interests  of  the  road,  and  the  powerful  influence 
which  they  exert  in  the  general  course  of  the  market. 

In  the  course  of  its  rise  to  its  present  position,  the  Union  Pacific 
has  undergone  some  extraordinary  fluctuations,  even  after  its 
management  had  begun  to  show  splendid  results.  It  sold  as  low 
as  $44  per  share  in  1900,  rising  to  $133  the  year  following,  a  jump  of 
almost  200%.  In  the  slump  of  1903  it  sold  down  to  $65  per  share, 
even  in  the  face  of  very  large  earnings,  and  in  1905  was  still  to  be 
bought  for  $113  per  share.  In  1906  it  sold  from  a  low  level  of  $139 
in  May  to  $195  in  Sept.,  subsequently  dropping  to  $120,  on  March 
14,  1907.  This  was  very  near  to  the  low  level  of  1905,  when  the 
dividend  was  raised  from  a  4%  to  a  5%  basis.  While  this  spec- 
tacular fall  in  price  was  not  as  heavy  as  in  some  other  stocks,  no- 
tably the  Hill  stocks,  it  still  serves  to  indicate  that  hippodrome  divi- 
dends do  not  necessarily  make  for  stability  of  price. 

Union  Pacific  preferred  is  limited  to  4%  and  may  be  considered 
as  solid  a  preferred  stock  as  is  to  be  found  on  the  list.  It  sold  above 
par  in  1905,  declining  as  low  as  $92  in  May  of  1906.  It  sold  as  low 
as  $84  a  share  in  1903.  Its  price  will  obviously  fluctuate,  like  the 
bond  list,  with  the  prevailing  money  rate. 

The  New  Convertibles. 

In  May  of  1907  the  stockholders  were  offered  the  privilege  of 
subscribing  to  $75,000,000  par  value  of  the  new  4%  20-year  con- 
vertible bonds  at  90,  and  to  the  extent  of  25%  of  their  holdings. 
The  bonds  are  convertible  at  any  time  before  July  1st,  1917,  into 
common  stock  at  $175  per  share  and  are  redeemable  at  the  option 
of  the  company  after  July  1st,  1912  at  102^.  Purchased  at  the 
subscription  price  of  90,  the  equivalent  conversion  price  for  the 
common  stock  would  be  157^.  This  was  slightly  above  the  pre- 
vailing prices  for  Union  Pacific  at  the  time. 


VANDALIA    RAILROAD. 


'1^1 


The  Vandalia  is  one  of  the  subsidiary  Pennsylvania  lines 
which  carries  the  Pennsylvania  system  westward  from  Indianap- 
olis, and  southward  from  South  Bend  and  Butler,  Ind.,  to  Vin- 
cennes  and  St.  Louis.  The  present  company  is  a  new  one,  hav- 
ing been  formed  at  the  close  of  1904  by  the  consolidation  of  the 
Terre  Haute  and  Indianapolis,  the  St.  Louis,  Vandalia  and  Terre 
Kaute,  the  Terre  Haute  and  Logansport,  the  Logansport  and 
Toledo,  and  the  Indianapolis  and  Vincennes.  It  is  therefore  a 
feeder  for  the  Panhandle  and  the  Pennsylvania  Lines  west. 

Through  the  leasing  of  the  Terre  Haute  and  Peoria  Railroad 
to  the  Terre  Haute  and  Indianapolis,  the  line  gained  an  addi- 
tional 145  miles,  bringing  up  the  total  of  the  operated  to  824. 

All  of  the  consolidated  roads  were  small  lines  owned  by  the 
Pennsylvania  Company,  and  of  the  merger  company's  stock — 
$14,650,000— the  Pennsylvania  Company  owned  in  1906,  $11,633,- 
430,  and  the  Panhandle  $541,600,  or  more  than  two-thirds.  The 
directorate  is  made  up  chiefly  of  Pennsylvania  Company  directors, 
and  the  affiliations  of  the  Vandalia  are  naturally  those  of  the  Penn- 
sylvania lines. 

Capitalization. 

On  January  1st,  1907,  the  capital  account  stood  as  follows: 

Common  stock $14,139,930 

Stocks  of  merger  lines 509,616 

Total  stock $14,649,546 

Funded   Debt 14,100,000 

Nominal  capital $28,749,546 

Rentals  cap.  at  4% 0,008,050 

Approx.   gross   capitalization ....   $37,757,596 
Securities  held 228,235 

Approx.  net  capitalization $37,529,361 

(718) 


VANDALIA  719 

Approx.  cap.  per  mile $45,301 

Average    miles    operated 828 

Net  earnings  on  net  capitalization 5.9% 

Stock  on  net  capitalization 40% 

Fixed  charges  on  Total  net  Income 54% 

Factor  of   Safety 46% 

It  will  be  seen  that  the  average  capitalization  per  mile  for  a 
road  earning  $10,754  per  mile  was  not  low;  for  1906  the  net 
earnings  showed  5.9%  on  the  estimated  net  capitalization,  which 
is  rather  about  the  same  as  that  of  the  other  Pennsylvania  Lines 
West. 

The  stock  represented  40%  of  the  estimated  net  capitali- 
zation, and  the  Fixed  Charges  consumed  a  little  over  half  of  the 
total  net  income,  leaving  an  ample  Factor  of  Safety  for  the  obli- 
gations of  the  road. 

The  company  has  practically  no  holdings  in  other  companies, 
and  therefore  no  equities. 

Traffic  and  Earnings. 

Of  the  gross  earnings  of  1906  passenger  traffic  made  up  about 
25%,  of  the  total;  and  of  the  freight  tonnage,  bituminous  coal 
was  the  chief  item.  Coal  and  coke  combined  made  up  about  half 
of  the  gross  tonnage.  Farm  products  and  animals  made  up 
14%,  lumber  9%,  manufactures,  18%. 

In  the  following  table  the  operations  of  the  separate  roads 
have  been  grouped  together  to  make  up  items  for  1904,  while  the 
columns  for  1905  and  1906  represent  the  operations  of  the  Van- 
dalia  company. 


Gross  earnings 

Operating  expenses  and  taxes.  .  . . 

Net  earnings 

Other  income 

Total  net  income 

Fixed  charges,  exclusive  of  taxes 
Surplus 


1904 


$8,261,781 
6,443,055 
1,818,725 

289,916 
2,108,642 

857,253 
1,251,389 


1905 


$7,845,222 

6,1.50,052 

1,695,168 

34,271 

1,729,439 

743,973 

985,465 


1906 


$8,904,859 
6,931,890 
1,972,968 
81  905 
2,054,874 
994,322 
1,060,552 


The  gross  earnings  of  the  combined  companies  for  1904 
were  slightly  in  excess  of  those  of  1905,  owing  to  the  increased 
traffic  due  to  the  St.  Louis  Fair.  The  Other  Income  (and  the  sur- 
plus) shown  includes  $246,336  of  accumulated  dividends  paid  in 
that  year. 


720 


VANDALIA 
Maintenance. 


The  maintenance  charges  for  the  combined  roads  for  1904 
and  the  consolidated  company  for  1905  and  1906  compared  as 
follows : 


Traffic  Density 

Maintenance  per  Mile 

Total 

Way            Equipment 

1904 

763,581 

862,064 

1,036,588 

$1,115              $1,757 
1,254                 1,630 
1,501                 2,021 

$2,872 
2,884 
3,522 

1905 

1906 

Average 

887,411 

$1,290               $1,802 

$3,092 

In  addition  to  the  amounts  thus  expended,  $325,000  was 
transferred  to  begin  an  extraordinary  expenditure  fund  in  1905, 
and  $400,000  was  added  from  the  surplus  of  1906. 

Surplus. 

Before  the  extraordinary  expenditure  fund  had  been  charged 
off,  the  surplus  for  the  year  1905  for  the  new  company  amounted 
to  $985,465,  which  was  equivalent  to  6.6%  on  the  capital  stock. 

This  enabled  the  company  comfortably  to  pay  a  4%  divi- 
dend, create  its  improvement  fund,  and  pass  $96,000  to  the  credit 
of  Profit  and  Loss.  For  1906  the  surplus  shown  was  $1,060,552, 
equivalent  to  7.2%  on  the  capital  stock;  4^%  was  paid  in  divi- 
dends. 

The  balance  sheet  at  the  close  of  1906  showed 

Current  Assets $3,798,462 

Current  Liabilities 1,753,738 

Leaving  a  working  balance  of $2,044,724 

The  company  had  on  hand  $2,765,248  cash  and  the  balance 
to  credit  of  Profit  and  Loss  at  the  close  of  the  year  was  $1,147,- 
467;  the  latter  figure  was  a  slight  decrease  from  the  previous 
year. 

Since  the  Pennsylvania  owns  two-thirds  of  the  stock  of  the 
company,  the  floating  supply  is  of  no  value  save  for  the  purpose 
of  investment.  On  the  basis  of  two  years'  showing  it  is  easily 
able  to  pay  4y2  or  5%  and  still  set  aside  a  nearly  equivalent 
amount  for  improvements. 

Forming  the  western  end  of  an  important  system,  the  traffic 


VANDALIA  721 

of  the  road  should  grow  with  the  system,  and  the  earnings  of 
the  latter  showed  an  enormous  gain  in  the  years  of  1905-7  in 
consequence  of  the  immense  improvements  which  have  been 
undertaken  and  which  are  still  under  way. 

As  a  solid  4%  stock,  with  excellent  prospects,  placed  on  a  5% 
basis  in  1907,  Vandalia  should  readily  sell  at  between  $80  and  $100 
per  share.  It  sold  at  the  latter  figure  when  it  was  first  listed  on  the 
exchange  in  1905,  receding  to  $85  in  the  same  year.  The  highest 
and  lowest  quotations  for  1906  were  $83  and  $85,  respectively. 

At  these  figures,  with  money  at  4%,  the  stock  should  present 
an  attractive  purchase,  but  in  1906  rates  of  money  were  very 
much  higher,  which  is  sufficient  to  account  for  the  quotation 
shown. 


49 


WABASH  RAILROAD. 

The  Wabash  is  the  connecting  link  of  the  Gould  railways 
between  the  recently  acquired  Western  Maryland  and  the  exten- 
sive system  of  southwestern  railways  dominated  by  the  Missouri 
Pacific.  The  main  line  of  the  road  extends  from  Toledo,  Ohio, 
westward  to  St.  Louis  and  Kansas  City,  with  branching  lines 
to  Omaha  and  Des  Moines,  la.  There  is  another  line  from  De- 
troit through  to  Chicago,  and  from  Chicago  to  St.  Louis,  and 
trackage  rights  over  the  Grand  Trunk  extend  the  road  eastward 
from  Windsor,  Ontario,  to  Buffalo.  Connections  with  the  West- 
ern Maryland  are  established  through  the  Wheeling  and  Lake 
Erie  running  eastward  from  Toledo,  and  the  Wabash-Pittsburgh 
Terminal  Railway,  which  carries  the  Gould  lines  into  Pittsburgh. 

Occupying  very  much  the  same  territory  as  crack  roads  like 
the  Lake  Shore,  the  Michigan  Central,  and  the  Chicago  and 
Alton,  the  Wabash  has  always  occupied  a  distinctly  secondary 
position.  For  a  long  period  and  up  to  very  recent  years  it  was 
more  of  a  football  for  the  stock  market  than  a  railroad,  and  its 
conduct  was  characterized  by  every  form  of  scandal  and  stock 
jobbery  which  tended  to  bring  American  railroading  into  dis- 
repute in  former  years.  With  the  abrupt  change  in  the  Gould 
policy,  which  came  with  the  advent  of  the  younger  generation 
to  power,  a  solid  upbuilding  of  the  road  was  begun.  Heavily 
handicapped  by  an  enormous  load  of  debt  and  a  form  of  capi- 
talization that  hindered  the  sale  of  new  securities,  this  was  not 
an  easy  task. 

Under  the  refunding  plan  brought  forward  in  1906  these 
hindrances  bid  fair  to  be  removed,  and  it  may  be  that  a  new  era 
for  the  Wabash  has  begun. 

History. 

The  present  Wabash  represents  the  combination  of  the  old 
Wabash  Railroad  with  the  St.  Louis,  Kansas  City  and  North- 
ern. The  old  Wabash  represented  the  reorganization  of  the 
Toledo,  Wabash  and  Western,  which  was  again  an  amalgamation 

(722) 


WABASH  723 

of  many  small  lines.  After  the  merger  of  the  St.  Louis,  Kansas 
City  and  Northern,  the  Company  was  known  as  the  Wabash, 
St.  Louis  and  Pacific,  and  extended  from  Toledo,  on  Lake  Erie, 
to  Kansas  City  and  other  points.  In  1883  the  system  was  leased 
to  the  Iron  Mountain  under  an  outrageous  contract,  subsequently 
surrendered,  and  in  1884  the  road  went  into  the  hands  of  a 
receiver  and  stayed  there  for  five  years.  In  1889  it  was  foreclosed 
and  taken  over  by  the  present  company,  but  the  reorganization 
failed  to  scale  down  its  load  of  debt,  and  under  this  load  it 
dragged  along  in  a  hopeless  sort  of  way  until  it  was  taken  in 
hand  by  the  newer  Gould  influences.  The  last  ten  years  have 
witnessed  a  steady  upbuilding  of  the  property.  In  1895  Joseph 
Ramsay,  Jr.,  was  made  vice-president  and  general  manager,  and 
in  1901  president,  continuing  in  that  position  until  1905.  Under 
his  administration  the  earnings  per  mile  rose  from  $6,600  to 
$9,900,  a  gain  of  50%,  in  a  highly  competitive  territory.  During 
all  this  time  all  of  the  surplus  earnings  were  turned  back  into 
the  road. 

The  Wabash  in  1906  operated  a  total  of  2,517  miles,  of  which 
275  represented  trackage  rights  from  Detroit  to  Buffalo  over 
the  Grand  Trunk  Railway.  In  addition  to  this  mileage,  the 
system  has  in  the  subsidiary  Wheeling  and  Lake  Erie,  448  miles 
and  in  the  new  Wabash-Pittsburgh  Terminal  road,  60  miles 
more.  The  Wabash  owns  all  the  stock  of  the  Wabash-Pittsburgh 
Terminal  Company,  which  in  turn  owns  a  clear  controlling  in- 
terest in  the  Wheeling  and  Lake  Erie,  thus  bringing  the  total 
mileage  of  the  system  up  to  over  3,000  miles.  The  completion 
of  the  West  Virginia  Central  &  Pittsburgh  will  connect  the  Wabash 
with  the  Western  Maryland,  so  that  it  will  have  a  direct  outlet  to 
seaboard,  and  its  Western  connections  with  the  Gould  system  ensure 
it  a  steady  traffic  from  the  West. 

Ownership. 

The  road  has  been  to  all  intents  and  purposes  a  Gould  prop- 
erty since  the  merger  of  1879,  and  very  distinctly  since  the 
reorganization  of  1889.  The  directorate  of  1906  was  made  up 
of  George  Jay  Gould,  president  of  the  Missouri  Pacific,  and  head 
of  the  Gould  system;  Edward  T.  Jeffery,  chairman  of  the  board, 
and  president  of  the  Denver  and  Rio  Grande  and  of  the  West- 
ern Pacific;  Frederic  A.  Delano,  the  new  president  of  the  Wabash; 
Robert    C.     dowry,    general     manager    of    the    Western     Union 


724  WABASH 

Telegraph  Company,  a  Gould  property;  Edgar  T.  Welles,  vice- 
president;  Wells  H.  Blodgett,  third  vice-president  and  general 
counsel ;  Winslow  S.  Pierce,  then  president  of  the  Western  Mary- 
land, counsel  and  director  for  various  Gould  properties ;  Robert 
M.  Gallaway,  president  of  the  Merchants'  National  Bank  of  New 
York,  also  a  director  in  numerous  other  Gould  properties  as  well 
as  of  the  Southern  Railway;  Thomas  H.  Hubbard,  president  of 
the  Guatemala  Central  Railroad,  chairman  of  the  board  of  the 
International  Banking  Corporation,  also  a  director  in  the  com- 
peting Toledo,  St.  Louis  and  Western  ("Clover  Leaf")  ;  J.  J. 
Slocum,  representing  the  Russell  Sage  Estate ;  John  T.  Terry, 
vice-president  of  the  Milwaukee  Trust  Company,  also  a  director 
in  the  Iron  Mountain,  the  Texas  and  Pacific  and  other  Gould 
properties ;  William  B.  Sanders  and  S.  C.  Reynolds. 

It  will  be  seen  that  the  board  was  chiefly  made  up  of  the 
presidents  of  the  Gould  lines  and  Mr.  Gould's  close  business 
associates.  When  Mr.  Ramsay  was  ousted  from  the  presidency 
in  1905  he  attempted  to  contest  the  Gould  supremacy  of  the  road, 
but  the  result  left  no  doubt  as  to  the  fact  that  the  Gould  interests 
have  absolute  control. 

Despite  the  fact  that  the  stock  has  never  paid  a  dividend 
and  has  very  slight  prospects,  it  is  curious  to  find  that  the  road 
reported  in  1905  1,974  shareholders,  and  the  controlled  Wheeling 
and  Lake  Erie  1,004,  a  fact  which  illustrates  the  propensity  of 
the  public  to  buy  most  anything  that  is  offered  it. 

The  Gould  lines  are  distinctly  not  a  part  of  the  New  York 
Central-Pennsylvania  community  of  interest  organization,  and 
therefore  meet  with  more  direct  competition  than  the  other  roads 
occupying  the  same  territory.  From  this  it  results  also  that  the 
Wabash  has  to  depend  very  largely  upon  the  Western  Gould 
lines  for  its  outside  business:  but  it  is  to  be  noted  that  since  its 
victory,  after  a  hot  fight,  for  entrance  into  Pittsburgh,  and  the 
possession  of  the  Western  Maryland  by  the  Gould  interests,  the 
Wabash  is  in  a  vastly  different  position  than  at  any  previous 
time  in  its  history,  though  the  results  of  these  new  combinations 
have  hardly  yet  begun  to  tell. 

The  removal  of  Mr.  Ramsay  from  the  presidency  was  the 
occasion  of  considerable  changes.  The  Ramsay  policy  had  been 
one  of  heavy  expenditures  for  improvements  and  high  mainte- 
nance charges,  and  the  change  from  this  policy  is  reflected  in  the 


WABASH  725 

heav)   drop  of  these  charges  for  190o.     Mr.  Ramsay's  successor 
was  Frederic  A.  Delano,  elected  president  in  October,  1905. 

At  the  same  time  George  Jay  Gould,  who  had  been  chair 
man  of  the   board  of  directors,   retired   from    that   position,   and 
was  succeeded  by    Edward  T.  Jeffery,  long  associated   with   the 
Illinois  Central  and  now  president  of  the  Denver  and  Rio  Grande. 

Capitalization. 

In  1906-7.  a  scheme  of  recapitalization  was  carried  out, 
whereby  $30,000,000  par  value  of  debenture  bonds  were  ex- 
changed for  $21,862,500  of  new  refunding  4%  bonds  and  $31,620,- 
000  of  new  stock,  divided  equally  between  common  and  pre- 
ferred. The  effect  of  this  conversion,  supposing  it  completed, 
was  to  add,  net,  $24,482,500  to  the  capitalization  of  the  road  and 
to  add  $874,500  to  the  fixed  charges.  This  recapitalization  plan  is 
fully  outlined  under  the  heading  of  "Refunding  Plan,"  later  in 
this  analysis.  Were  the  capital  account  considered  in  relation 
to  the  income  of  the  fiscal  year  of  1906,  the  result  would  have 
been  as  follows : 

(Capital  Account  under  Recapitalization  Scheme — Income  of  1906.) 

Common  stock— old $38,000,000 

—new 15,810,000 

Preferred  stock— old 24,000,000 

—new 15,810,000 

Total $93,620,000 

Funded  Debt— Bonds 66,788,000 

Notes 13,160,000 

Equipment 1,349,612 

New  refunding 21,862,500 

Total  capital $196,780,112 

Rentals  capitalized  at  4% 18,415,750 

Approximate  gross  capitalization $215,195,862 

Securities  held 22,856,093 

Approximate  net  capitalization $192,339,769 

Approximate  net  capital  per  mile $76,416 

Average  miles  operated 2,517 

Net  earnings  on  net  capital 3.6% 

Stock  on  net  capitalization 48% 

Fixed  charges  on  total  net  income 80% 

Factor  of  safety 20% 

Actually  at  the  close  of  the  fiscal  year  of  1906,  as  of  June 
30th,  the  capital  account,  considered  in  relation  to  the  income 
for  the  year,  appeared  as  below.  In  this  analysis  the  two  series  of 
debenture  bonds  have  been  included  under  stock,  since  these  bonds 


726  WABASH 

had  voting  rights  in  proportion  of  one  vote  for  each  $100  nomi- 
nal value,  and  the  interest  payments  thereon  optional. 

(Actual  Capital  Account  as  of  June  30th,  1900.) 

Common  stock $38,000,000 

Preferred  stock 24,000,000 

Debenture  Bonds,  Series  A 3,500,000 

Debenture  Bonds,  Series  B 26,500,000 

Total  stock  and  debentures $92,000,000 

Funded  Debt 66,788,000 

Equipment  Trusts 1,349,612 

Notes 13,160,000 

Total  capital " $173,297,612 

Rentals  capitalized  at  4% 18,415,750 

Approximate  gross  capital $191,713,362 

Securities,  etc 22,856,093 

Approximate  net  capital $168,857,269 

Approximate  net  capital  per  mile $69,150 

Average  miles  operated 2,517 

Net  earnings  on  net  capitalization 3.9% 

Stock  on  net  capitalization 52% 

Fixed  charges  on  total  net  income 71% 

Factor  of  Safety 29% 

The  rentals  capitalized  are  the  net  rentals  after  deducting 
rentals  received.  In  addition  to  the  fixed  rentals  paid  by  the 
Wabash  for  the  Grand  Trunk  line  to  Buffalo,  it  pays  its  propor- 
tion of  the  maintenance  charges  of  the  line.  It  will  be  seen  that 
in  the  above  estimate  the  estimated  net  capitalization  amounts 
to  $69,150  per  mile,  which  on  a  road  of  the  traffic  of  the  Wabash 
is  certainly  high.  It  is  nearly  as  high  as  that  of  the  Lake  Shore, 
$78,987,  with  a  magnificent  property  and  earnings  of  $25,000  per 
mile,  and  stands  against  an  also  similar  estimate  of  $32,058  per 
mile  for  the  Michigan  Central,  another  superbly-built  property. 

The  fact  of  high  capitalization  is  further  reflected  in  the 
percentage  which  the  net  earnings  show  on  the  net  capitaliza- 
tion, the  figure  for  the  Wabash  amounting  to  only  3.9%,  as 
against  about  10%  for  the  Michigan  Central  and  12.7%  for 
the  Lake  Shore.  The  road  belongs  more  in  the  category  of  the 
Nickel  Plate,  which  is  capitalized  at  $94,449  per  mile,  but  whose 
net  earnings  still  showed,  in  1906,  6.0%  on  its  capitalization. 

However,  counting  as  stock  the  debenture  bonds  which  only 
pay  interest  in  case  it  is  "earned" — a  matter  more  or  less  at  the 
discretion  of  the  bookkeeping  department — the  total  stock 
makes  up  a  full  half  of  this  capitalization,  and  upon  this  entire 


WABASH  727 

amount  of  stock,  including  the  debentures,  nothing  whatever  was 
paid  in  1905  or  1906. 

The  real  weakness  of  the  company  lies  in  the  fact  that  Fixed 
Charges  excluding  any  interest  on  debentures,  consumed  in 
1906,  after  heavily  reduced  maintenance  charges,  over  70%  of 
the  total  net  income,  leaving  a  factor  of  safety  for  the  underlying 
securities  of  less  than  30%.  The  earnings,  however,  of  a  road 
with  the  east  and  west  connections  of  the  Wabash  should  be  so 
stable  that  there  is  less  danger  in  this  low  percentage  than 
would  be  true  of  a  road  differently  situated,  and  it  is  likely  that 
this  margin  of  safety  will  progressively  increase,  especially  if  the 
hopes  centered  on  the  Wabash  Terminal  properties  are  realized. 

Equities  Owned. 

Of  the  $17,000,000  book  value  of  Wabash  securities  owned, 
the  chief  item  is  the  $10,000,000  of  stock  (all)  of  the  Wabash- 
Pittsburgh  Terminal  Railroad,  which  was  exchanged  at  par  for 
$10,000,000  of  Wabash  common  stock.  As  already  noted,  rhf 
treasury  of  the  Terminal  Company  holds  a  controlling  interest 
in  the  Wheeling  and  Lake  Erie,  consisting  of  $11,870,000,  par 
value  of  the  common,  $847,500  of  the  first  preferred  and  $6,423,- 
800  of  the  second  preferred.  On  none  of  this  stock  is  any  divi- 
dend being  paid,  and,  although  the  earnings  of  this  property 
have  been  rapidly  expanding,  the  prospects  of  dividends  were 
not  large,  since  in  1905  the  road  earned  a  deficit  and  in  1906  but 
a  small  surplus. 

In  addition  to  this  stock,  but  not  included  in  the  list  of  securi- 
ties held,  the  Wabash  had  in  1906  a  loan  to  the  Terminal  Com  • 
pany  of  $5,000,000. 

The  Wabash  owns  also  one-fifth,  or  $1,000,000,  par  value,  of 
Chicago  and  Western  Indiana  Railroad,  over  whose  tracks  it 
secures  entrance  into  Chicago. 

At  the  present  time  it  cannot  be  said  that  the  Wabash  has 
any  extensive  equities  beyond  what  were  represented  in  its 
Other  Income  of  $1,020,000,  in  1906.  The  bonded  debt  of  the 
Wabash-Pittsburgh  Terminal  Co.  is  very  high,  and  the  earnings 
on  this  road  must  be  large  in  order  to  pay  the  Fixed  Charges. 
In  the  course  of  time,  however,  the  Wabash  interest  in  this 
road  might  become  valuable. 


728 


WABASH 


Increase  of  Capitalization. 

The  increase  of  capitalization  since  1900  has  been  as  follows : 


Year 

Common 
Stock 

Preferred 
Stock 

Funded 

Debt 

(Inc.  Deb's.) 

Total 
Capital 

Gross 
Earnings 

1899-0.  .  . 
1905-6.  .  . 

$28,000,000 
38,000,000 

$24,000,000 
24,000,000 

$83,045,000 
109,948,000 

$135,045,000 
171,948,000 

$16,440,990 
25,015,378 

Increase  over  six  years:  Total  capital,  26%;  gross  earnings,  51%. 
The  increase  in  common  stock  was  in  exchange  for  Wabash- 
Pittsburgh  Terminal  stock,  as  already  explained.  Terminal 
bonds  to  the  extent  of  $10,000,000  were  issued  in  1904  to  secure 
additional  terminals  at  St.  Louis,  Kansas  City  and  other  points. 
There  were  also  issued  $13,160,000  of  notes,  included  in  the 
above,  for  terminals  at  Pittsburgh.  The  entire  stock  and  $6,6CC,- 
000  of  first  mortgage  Wabash-Pittsburgh  Terminal  bonds  and 
other  collateral  were  pledged  to  secure  these. 

Character  of  Traffic. 

Like  the  other  Gould  lines,  the  Wabash  does  not  itemize  its 
tonnage,  but  a  very  considerable  part  of  its  traffic  is  coal  derived 
from  the  lines  of  the  Wheeling  and  Lake  Erie.  The  percentage 
of  freight  earnings  to  gross  have  increased  very  considerably, 
but  passenger  earnings  are  high,  amounting  to  above  25%  of  the 
gross  in  1906. 

Surplus  Earnings. 

The  Wabash  earnings  per  mile  reached  a  high  point  in  1892, 
when  on  1,916  miles  of  road  they  amounted  to  $7,506  per  mile. 
On  about  the  same  mileage  they  declined  to  $5,953  per  mile  in 
1897.  From  this  point  they  have  risen  steadily,  reaching  nearly 
$10,000  per  mile  in  1906.  The  items  for  eleven  years  are  as  fol- 
lows : 

Year 


1895-6. 
1896-7. 
1897-8. 
1898-9. 
1899-0. 
1900-1. 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1905-6. 


Miles  Operated 

Gross  Earnings 

Per  Mile 

1,936 

$12,807,143 

$6,615 

1,936 

11,526,787 

5,953 

2,061 

13,207,862 

6,408 

2,278 

14,393,974 

6,318 

2,340 

16,440,990 

7,626 

2,360 

17,554,465 

7,438 

2,438 

19,053,493 

7,815 

2,483 

21,140,831 

8,513 

2,517 

23,023,677 

9,148 

2,517 

24,696.600 

9,831 

2,517 

25,015,378 

9,937 

WABASH  729 

These  increased  earnings  have  been  in  the  face  of  a  steadily 
decreasing  freight  rate.  Going  back  a  little,  the  Wabash  re- 
ceived in  1882  an  average  of  .93c.  per  ton  per  mile,  this  average 
rate  declining  to  .70c.  in  1882,  and  to  .55c.  in  1899.  For  the  most 
of  roads  this  was  a  bedrock  year,  and  other  lines  in  the  sanu 
territory,  the  Pennsylvania  and  New  York  Central  lines  notably, 
have  since  shown  a  considerable  increase  from  this  point.  So  did 
the  Wabash  for  a  time,  the  figure  reaching  .64c.  in  the  St. 
Louis  fair  year  of  1904,  but  in  1906  the  rate  was  .54c.  This  was  a 
lower  average  rate  than  in  the  low  year  of  1899.  Speaking  of  the 
rate  in  1906  the  general  traffic  manager  said:  "These  figures 
taken  by  themselves  are  discouraging,  but  are  due  to  an  increase 
in  average  haul  rather  than  to  a  general  decrease  in  rates,"  the 
average  haul  having  increased  about  10%  in  1906  over  1905. 
President  Delano  remarked  further:  "The  management  is  not 
apprehensive  of  a  serious  reduction  of  the  present  scale  of  rates, 
which  in  our  territory  is  very  low." 

The  net  earnings  per  ton  per  mile  in  1905  amounted  to 
only  .44  cents,  owing  to  very  heavy  maintenance  charges.  In 
1906,  through  a  drastic  cut  in  the  maintenance  appropriations, 
the  new  management  showed  net  freight  earnings  of  1.5  cents 
per  ton  per  mile,  a  fact  which  is  reflected  in  the  increased  sur- 
plus for  the  year. 

Maintenance. 

For  some  years  under  the  Ramsay  management  considerable 
sums  for  improvements  were  charged  to  earnings,  the  total  ap- 
propriations rising  to  $3,409  per  mile  in  1905.  In  1906,  under  the 
new  management,  charges  for  both  way  and  equipment  were 
very  considerably  reduced,  the  reduction  amounting  to  $357  per 
mile  on  maintenance  of  way  and  $355  per  mile  for  maintenance 
of  equipment.  The  two  together  amounted  to  a  difference  of 
$712  per  mile,  which  on  the  2,517  miles  of  road  operated  made 
a  difference  of  $1,764,000  in  the  operating  expenses  of  the  year. 
It  was  mainly  by  this  means  that  a  considerable  surplus  was 
shown  in  1906,  as  against  a  deficit  in  1905.  The  items  for  six 
vears  stand  as  follows : 


730 


WABASH 


Year 

Traffic  Density 

Maintenance  per  Mile 

Total 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

S38.539 
798,775 
885,603 
864,394 
929,547 
963,318 

$1,044 
1,196 
1,490 
1,463 
1,592 
1,235 

$1,066               $2,110 
1,025                 2,221 
1,258                  2,748 
1,380                  2,843 
1,817                 3,409 
1,462                 2,697 

Average.  . . . 

880,032                 $1,332 

$1,370 

$2,702 

Nickel  Plate . . 
C.  C.  C.  &St.  L 

T.  St.  L.  &  W. 

2,528,054 
1,105,215 
959,668 
1,046,149 
1,099,515 

2,042 
1,443 
1,254 
996 
1,371 

1,966 
1,614 
1,630 
959 
1,273 

4,008 
3,057 
2,884 
1,955 
2,644 

It  will  be  seen  that  the  Wabash's  charges,  traffic  density 
compared,  have  been  fully  up  to  the  standard  of  other  lines  in 
the  same  territory — the  Big  Four,  a  Vanderbilt  line,  the  Van- 
dalia,  a  Pennsylvania  line,  and  the  Alton,  then  a  Harriman  line. 

But  this  was  with  the  heavy  charges  under  the  Ramsay 
management.  The  total  appropriations  for  1906  were  just  about 
up  to  the  average  appropriations  for  the  six  years,  with  no  great 
increase  in  traffic  density;  and  if  these  may  be  accounted  some- 
where near  the  normal  maintenance,  the  road  is  in  a  better  posi- 
tion now  than  ever  before  in  its  history. 

In  addition  to  the  amounts  devoted  to  maintenance  the  road 
has  for  a  series  of  years  practically  turned  back  all  its  surplus 
into  improvements,  and  while  the  amounts  so  appropriated  have 
not  been  large  for  a  road  doing  a  gross  business  of  $25,000,000 
a  year,  they  have  been  steadily  increasing  to  a  point  where  the 
appropriations  for  1906  amounted  to  more  than  25%  of  the 
regular  appropriations  for  maintenance.  The  items  since  1900 
stand  as  follows : 


1899-00 $223,664 

1900-1 544,126 

1901-2 583,500 

1902-3 653,132 

1903-4 915,107 

1904-5 1,167,869 

1905-6 1,758,626 

Total $5,846,024 


WABASH 
Surplus  Earnings. 


731 


The  nominal  surplus,  under  tlie  conditions  described  above, 


have  through  a  series  of  years  stood  as  follows: 


Year 

Surplus 

Per  cent. 

Earned  on 

•B"  Deb. 

Average 

Price. 
"B"  Deb. 

1900-1 

$847,262 

994,960 

i,059,283 

1,034,398 

291,503 

2,267,963 

2.5 
3.0 
3.3 
3.2 

i'.i 

55 

1901-2 

78 

1902-3 

1903-4 

1904-5 Deficit 

1905-6 

68 
63 
75 
79 

These  items  are  not  the  nominal  surplus  shown  by  the 
reports  of  the  company,  but  represent  the  amount  of  surplus  before 
the  improvement  appropriations  have  been  made.  Thus,  in  1905, 
the  nominal  deficit  shown  by  the  road  was  $1,459,372,  and  in  1906 
the  nominal  surplus  amounted  to  $509,332.  The  amount  shown 
in  the  reports,  added  to  the  appropriations  for  improvements, 
constitute  the  surplus  shown  in  the  above  table. 

Debenture  Interest  Payments. 

From  1900  to  the  beginning  of  1904  the  full  6%  was  paid 
upon  the  three  and  a  half  million  dollars  of  debenture  bonds, 
series  "A,"  this  interest  charge  amounting  to  $210,000  per  year. 
No  payments  were  made  in  the  years  of  1905  and  1906,  and  no 
interest  has  ever  been  paid  upon  the  $26,500,000  of  debenture 
bonds,  series  "B."  The  full  6%  dividend  on  both  series  of  deben- 
tures would  call  for  $1,800,000,  and  it  is  apparent  that  had  no 
appropriations  been  made  for  improvements  in  1906,  the  full 
interest  on  these  debentures  was  nominally  earned.  In  March, 
1905,  a  committee  with  Henry  Evans,  president  of  the  Continen- 
tal Fire  Insurance  Company,  was  formed  to  request  the  deposit 
of  "B"  debentures  with  a  view  to  obtaining  an  adjustment  of 
interest  on  these  securities. 

The  Balance  Sheet. 

The  balance  sheet  of  June  30th,  1906,  showed: 

Current    assets $4,877,027 

Current  liabilities 5,671,312 

Leaving  a  debit  balance  of $794,285 


751  WABASH 

The  debit  balance  to  Profit  and  Loss  in  1905  of  $515,419  was 
turned  into  a  credit  balance  in  1906  of  $248,200. 

In  addition  to  the  items  above  included,  there  were  loans 
receivable  of  $5,000,000,  the  amount  loaned  by  the  Wabash  to 
the  Wabash-Pittsburgh  Terminal. 

It  is  obvious  that  the  road  at  the  close  oi  the  year  was  in 
need  of  working  capital. 

Refunding  Plan. 

in  1905  a  comprehensive  scheme  was  adopted  for  the  retire- 
ment of  the  $30,000,000  of  debenture  bonds,  the  refunding  of 
existing  bonds,  notes,  &c,  and  to  provide  the  company  with 
needed  new  capital.  A  new  issue  of  4%  50-year  refunding  mort- 
gage bonds  was  authorized,  to  the  amount  of  $200,000,000,  bear- 
ing date  of  July  1st,  1906,  and  secured  on  all  the  property  of  the 
company  at  that  date  owned,  or  subsequently  acquired  from  the 
proceeds  of  the  sale  of  these  bonds. 

Of  the  new  bonds  $21,862,500  were  set  aside  in  exchange  for 
the  debenture  bonds  under  the  following  terms: 

New  Preferred  Common 

Bonds.  Stock.  Stock. 

For  each  $1,000  Series  A..     $795  $580  $580 

For  each  $1,000  Series  B..       720  520  520 

To    further    provide    for    the    exchange    of    the    debentures 
under  the   above  offer  an   increase   was  authorized    in   the    pre- 
ferred stock  from  $24,000,000  to  $40,500,000  and  in  the  common 
stock  from  $78,000,000  to  $159,500,000.  or  a   total   of  $200,000. 
000  in  all. 

In  January  of  1907  more  than  80%  of  the  outstanding  deben- 
ture bonds  having  been  deposited,  the  plan  was  declared  opera- 
tive. The  effect  of  this  recapitalization  scheme,  supposing  the 
conversion  of  the  debentures  complete,  was,  as  already  noted,  to 
add  $21,862,500  to  the  bonded  indebtedness  and  $15,810,000  to 
the  preferred  and  an  equal  amount  to  the  outstanding  common 
stock,  or  a  net  capital  increase  of  $24,202,000. 

This  meant  an  addition  of  $874,500  to  the  interest  charges, 
and,  as  shown  in  the  capital  analysis  in  the  foregoing  pages, 
would  have  increased  the  percentage  of  total  net  income  con- 
sumed by  fixed  charges  from  69%  to  80%.  Even  under  the 
increased  earnings  of  1907  the  percentage  of  fixed  charges  was 


WABASH  733 

still  very  high,  so  that  the  $30,000,000  of  new  stock  given  as  a 
bonus  to  the  holders  of  the  debentures  was  of  only  prospective 
value  and  had  very  little  market  worth. 

Investment  Value. 

The  interest-bearing-  debt  of  the  Wabash,  $32,300  per  mile  in 
1906,  was,  on  a  road  with  gross  earnings  of  nearly  $10,000  per 
mile,  not  excessive,  and  yet  interest  charges  with  taxes,  &c, 
were  sufficient  to  consume  during  the  year  69%  of  the  total  net 
income.  The  balance  remaining  would  have  been  sufficient  to 
pay  the  full  6%  on  the  outstanding  debenture  bonds,  but  it 
would  have  left  less  than  2%  available  for  the  amount  of  pre- 
ferred stock  then  outstanding,  $24,000,000,  and  nothing  at  all  for 
the  $38,000,000  of  common  stock. 

As  a  matter  of  fact,  as  already  noted,  nothing  was  paid  on 
either  series  of  the  debentures  in  either  1905  or  1906  and  no 
interest  whatever  had  ever  been  paid  on  the  $26,500,000  of  series 
B.  Instead  of  these  payments,  $1,758,628  was  turned  back  into 
the  improvements  of  the  road  and  the  larger  part  of  the  balance 
was  consumed  by  sinking  fund  payments,  etc. 

The  issue  of  $21,862,500  of  new  bonds  under  the  refunding 
plan  brought  the  interest-bearing  debt  up  to  over  $103,000,000, 
or  more  than  $40,000  per  mile,  and  the  interest  charge  on  this 
increase  would  have  left  a  surplus  on  the  income  of  1906  of  only 
about  $1,150,000.  Ignoring  the  fact  that  the  Wabash  was  greatly 
in  need  of  new  equipment  and  betterments  in  order  to  provide 
for  its  increased  business,  this  would  have  been  equivalent  to 
less  than  3%  on  the  amount  of  preferred  stock  as  increased  under 
the  recapitalization  scheme — $39,810,000.  This  was  after  a  very 
considerable  reduction  in  maintenance  charges  from  the  year  pre- 
ceding, and  it  is  evident  enough  from  this  that  no  dividends  on 
the  preferred  were  in  sight. 

The  addition  to  the  interest-bearing  debt  brought  no  new 
capital  to  the  road  and  simply  exchanged  a  fixed  charge  of 
$874,500  for  the  debenture  bonds  upon  which  payment  of  interest 
was  optional.  The  report  for  1906  states :  "Competing  lines, 
great  systems  to  the  north  and  south  of  your  property,  have 
had  the  benefit  of  large  and  continued  capital  expenditures, 
while  the  Wabash  Company,  with  its  debenture  mortgage  as 
an    obstruction    to   every    important   source   of   new    capital,   has 


734  WABASH 

been  seriously  handicapped  in  this  respect,  restricted  as  it  has 
been  to  its  surplus  earnings  as  its  almost  exclusive  capital  fund, 
and  with  this  fund  limited  in  this  application  by  the  provisions  of 
the  mortgage." 

The  report  adds:  "Our  earnings  now,  some  $10,000  per  mile, 
ought  with  an  intelligent  expansion  of  our  facilities,  to  be  readily 
increased  to  even  double  that  figure." 

From  this  it  will  be  seen  that  the  Wabash  is  another  exam- 
ple of  the  fact  that  over-capitalization  is  powerless  to  compel 
higher  rates  or  increase  earnings,  and  that,  while  this  watered 
capital  may  be  of  some  use  for  stock  jobbing  purposes,  it  puts 
an  almost  insurmountable  obstacle  in  the  way  of  the  improve- 
ment of  the  property  and  the  ability  of  a  company  to  cope  with 
its  opportunities. 

The  preferred  stock  is  entitled  to  7fo  non-cumulative  divi- 
dends. This  stock  sold  as  high  as  $54  per  share  in  1902,  declin- 
ing to  $27  per  share  in  1903  and  rising  to  $53  per  share  in  1906. 
It  declined  again  to  $22  per  share  in  March  of  1907. 

Although  the  dividend  to  which  this  stock  is  limited  is  high, 
7°/o,  the  prospect  of  any  considerable  dividend  seemed  as  re- 
mote in  1907  as  at  any  time  during  the  preceding  six  years.  As 
a  purely  speculative  possibility,  the  stock  is  scarcely  entitled  to 
sell  higher  than  many  common  stocks  of  similarly  over-capital- 
ized roads,  and  is  scarcely  to  be  regarded  as  an  attractive,  solid 
investment.  It  is  evident,  however,  that  its  fluctuations  in  price 
are  wide  and  that,  barring  a  serious  set-back  in  business,  it  might, 
if  purchased  somewhere  around  the  low  level  of  1907,  show  in 
time  a  considerable  profit  to  the  speculative  holder. 

From  the  foregoing  it  is  evident  that  the  common  stock, 
increased  under  the  refunding  plan  to  $53,810,000,  is  of  no  value 
whatever  save  for  voting  and  for  stock  market  purposes.  It  sold 
as  low  as  $6j^>  per  share  in  l'XX),  rising  to  $38  per  share  in  1902. 
The  highest  price  of  1906  was  $26  per  share,  and  it  declined  in 
March  of  1907  to  %\2y2  per  share.  It  is  a  curious  fact  that  such 
stocks  always  seem  to  find  some  market  at  from  $5  to  $10  per 
share  under  almost  any  conditions  short  of  a  receivership.  Pur- 
chased at  such  low  figures,  they  often  yield  a  large  profit  to 
the  holder,  but  it  is  purely  a  hazard  and  dependent  on  the 
continuance  of  general  conditions  sufficient  to  offer  some  show 
of  prospective  value  and  the  continued  solvency  of  the  company. 

The  famous  contracl   made  by  Andrew   Carnegie  for  his  steel 


WABASH  735 

company  with  the  Wabash  Railroad  some  five  years  previous, 
whereby  the  Gould  lines  secured  25%  of  the  tonnage  of  the 
Carnegie  mills,  did  not  become  operative  until  the  close  of  the 
fiscal  year  of  1906.  It  is  estimated  that  in  and  out-bound  ton- 
nage of  the  Homestead,  Duquesne  and  Edgar  Thomson  mills 
is  16,000,000  tons,  of  which  25%  would  represent  4,000,000  tons. 
This  latter  amount  would  be  equivalent  to  about  33%  of  the 
total  tonnage  for  1906.  Were  the  Wabash  Company  able  to 
handle  this  amount  of  business  profitably,  it  is  obvious  that  it 
would  add  very  largely  to  the  freight  profits  of  the  road.  But  it 
is  to  be  noted  that  the  average  freight  rate  of  the  Wabash  has 
latterly  shown  a  tendency  to  decline,  decreasing  from  .64c.  in 
1904  to  .54c.  in  1906.  The  report  for  1906  states  that  the  "lines 
of  the  Wabash  traverse  a  zone  of  dense  traffic  handled  on  a 
basis  of  rates  normally  so  low  as  absolutely  to  require  ample 
and  perfect  facilities  for  economical  operation,  if  operation  is  to 
be,  and  to  continue  to  be,  profitable."  It  is  evident  that  the  Wabash 
could  not  handle  a  considerable  increase  of  traffic  without  pro- 
portionate capital  expenditures. 


WEST  JERSEY  AND  SEASHORE  RAILROAD. 

The  Philadelphia,  Atlantic  City  and  southern  Xew  Jersey  lines 
of  the  Pennsylvania  are  operated  under  the  name  of  the  West  Jersey 
and  Seashore  Railroad,  with  a  total  operated  mileage  of  368  miles. 
On  January  1st,  1907,  the  Pennsylvania  owned  $4,096,900  common 
and  $3,400  of  the  special  guaranteed,  out  of  a  total  of  $9,679,450 
outstanding  capital  stock.  A  majority  of  the  board  of  directors  are 
Pennsylvania  men.  Outside  of  these  the  direcorate  of  1906  included 
Benjamin  F.  Lee,  Trenton.  N.  J.;  Josiah  Wistar,  of  Woodbury.  X. 
J.;  William  G.  Nixon,  of  Bridgeton,  X.  J.;  Israel  G.  Adams,  of 
Atlantic  City.  N.  J. ;  George  S.  Bacon,  Millville.  X.  J.,  and  Robert 
\V.  Downing,  of  Philadelphia.  All  the  officers  are  Pennsylvania 
men. 

Mileage  operated  increased  from  310  in  1896  to  368  in  1906; 
gross  earnings  from  $2,554,920  to  $5,206,283  ;  the  surplus  earnings 
from  $263,224  to  $797,648.  For  1906  the  road  showed  total  net 
earnings  of  $1,276,076  and  Fixed  Charges  were  $478,428  or  40%. 
From  the  surplus  earned,  a  dividend  of  6%  was  paid  on  the  common 
together  with  6%  on  the  $37,850,  of  special  guaranteed  stock  and 
$274,728  was  carried  to  credit  of  Profit  and  Loss. 

The  entire  surplus  earnings  of  1901-2-3  were  devoted  to 
extraordinary  expenditures;  in  1904.  $331,254;  in  1905,  $552,000. 
Five  per  cent,  was  paid  on  the  common  stock  for  a  series  of  years. 
In  1906  this  was  increased  to  6%. 

Maintenance  charges  have  not  been  heavy  in  themselves,  but 
with  a  round  half  million  dollars  per  year  added  for  special  improve- 
ments, this  should  be  amply  sufficient  to  keep  the  property  in  good 
condition.  The  dividend  of  6%  therefore  seems  a  solid  one.  and  on 
a  4%  money  basis,  the  stock  should  sell  in  the  neighborhood  of  $75 
per  $50  share.  The  shares  (par  value  $50)  sold  down  to  $55  in 
1904  and  rose  to  $72  in  the  first  half  of  1906,  declining  to  $59  in 
December. 

The  road  is  capitalized  for  about  $37,000  per  mile,  with  gross 
earnings  of  $14,555  per  mile;  and  should  the  latter  increase  in  the 

(736) 


WEST  JERSEY  &  SEASHORE  737 

same  steady  fashion  as  they  have  in  the  past  ten  years,  the  stock 
of  the  road  should  rule  higher  than  the  quotations  noted.  Below 
$70  per  share,  and  with  4%  money,  the  stock  should  represent  a 
solid  investment.  But  it  should  be  recalled  that  the  larger  part  of 
its  earnings  are  from  passenger  traffic,  largely  seaside  travel,  and 
that  in  a  bad  year,  this  might  be  expected  to  fall  off  rather  heavily. 


47 


WESTERN  MARYLAND  RAILROAD. 

The  Western  Maryland  Railroad  is  intended  as  the  eastern  out- 
let of  the  Gould  transcontinental  line,  which,  when  the  present  gap 
between  the  Western  Maryland  and  the  Wabash-Pittsburgh  Termi- 
nal is  rilled  in,  and  the  Western  Pacific  completed,  will  stretch  from 
the  Atlantic  to  the  Pacific  and  will  form  the  only  line  under  a  single 
management  from  coast  to  coast,  in  the  United  States. 

The  Western  Maryland  was  chartered  in  1852  and  the  opera- 
tions of  the  company  during  the  first  50  years  of  its  corporate 
existence  were  restricted  to  a  local  territory  in  Maryland  and  South- 
eastern Pennsylvania.  It  was  controlled  by  the  city  of  Baltimore 
and  operated  about  253  miles  of  road,  running  parallel  to  the  Balti- 
more &  Ohio.  In  1902  the  Gould  interests  acquired  the  interest  of 
the  city  of  Baltimore  in  the  road  and  likewise  the  West  Virginia 
Central  &  Pittsburgh  Railway.  The  gap  between  these  two  roads 
was  bridged  by  the  construction  of  a  line  54  miles  long  from  Cum- 
berland, Maryland,  to  Cherry  Run,  West  Virginia,  and  tidewater 
terminals  at  Baltimore  were  acquired  and  constructed. 

In  1905  the  Western  Maryland  Tidewater,  the  Potomac  Valley, 
Piedmont  &  Cumberland;  the  West  Virginia  Central  &  Pittsburgh, 
the  Bellington  &  Beaver  Creek  and  the  Coal  and  Iron  railways  were 
merged  in  the  larger  company,  and  in  January,  1907,  the  same 
interests  obtained  control  of  the  Uniontown  &  Wheeling  Shortline. 
The  company  has  now  a  through  line  from  the  coal  fields  of  West 
Virginia  to  Baltimore  and  in  1906  operated  a  total  of  544  miles.  An 
extensive  scheme  of  betterments  and  double  tracking  is  being  car- 
ried out  to  fit  the  road  to  handle  a  daily  increasing  business. 

The  company  owns  the  Davis  Coal  &  Coke  Company,  control- 
ling 110,000  acres  of  coal  lands  and  to  this  has  been  added  the  Mary- 
land Smokeless  Coal  Company  with  25,000  acres  of  Pittsburgh  gas 
coal,  so  that  the  present  holdings  of  the  company  are,  therefore, 
about  135,000  acres  of  coal  lands  with  23  mining  plants  and  823 
coke  ovens. 

(738) 


WESTERN  MARYLAND  739 

The  directorate  is  made  up  in  the  Gould  interest  and  with  the 
completion  of  the  connecting  line  with  the  Wabash  and  the 
Wheeling  &  Lake  Erie  the  property  will  be  operated  as  a  part  of 
the  eastern  Gould  system. 

Capitalization. 

As  of  June  30th,  1906,  the  capital  account  stood  as  follows : 

Common  stock $15,685,400 

Funded  Debt 55,776,875 

Construction   Loans 3,000,000 

Coal  Purchase  Notes 2,078,729 

Total    capital $76,541,004 

Rentals  capitalized  at  4% 4,288,345 

Approximate  gross  capitalization $80,829,349 

Securities  held 10,670,835 

Approximate  net  capitalization $70,158,514 

Approximate  net  capital,  per  mile $138,379 

Average  miles   operated 507 

Net  earnings  on  net  capitalization 2.5% 

Stock   on  net   capitalization 22% 

Fixed  charges  on  total  net  income 90% 

Factor   of   Safety 10% 

It  will  be  seen  from  the  above  that  the  interest  bearing  debt  is 
very  large,  the  amount  of  stock  small,  and  the  estimated  net  capitali- 
zation was  $138,379  on  a  road  with  gross  earnings  of  less  than  $10,- 
000  per  mile.  Net  earnings  on  this  estimate  of  net  capitalization 
amounted  to  only  2.5%  and  even  if  the  small  amount  of  stock  were 
eliminated,  the  figure  would  still  be  very  low.  The  company  is 
handicapped,  therefore,  by  a  very  heavy  burden  of  debt. 

In  1906  fixed  charges  consumed  90%  of  the  total  net  income. 

Stability  of  Earnings. 

The  consolidated  earnings  on  the  lines  now  embraced  in  the 
Western  Maryland  have  been,  in  the  four  full  years  since  the  Gould 
interest  obtained  control,  as  follows: 


740  WESTERN  MARYLAND 

1902-3 $3,712,833 

1903-4 3,633,097 

1904-5 3.900,249 

1905-6 4,802,094 

Nearly  half  of  the  tonnage  of  the  road  in  1906  was  bituminous 
coal,  and  mine  products  amounted  altogether  to  65%.  Lumber,  &c, 
made  up  15%  more  and  the  balance  was  distributed  over  a  variety 
of  traffic. 

The  rate  per  ton  mile  was  comparatively  high,  .73c,  and  the 
average  freight  earnings  per  train  mile  amounted  to  $2.58. 

Maintenance. 

Maintenance  charges  and  traffic  ■  density  for  1905  and  1906 
compare  as  follows : 

Maintenance 
Traffic  Density.         Way.  Equipment.      Total. 

1904-5 751,952  1,003  933  1,936 

1905-6 977,114  981  1,174  2,155 

It  will  be  seen  that  these  maintenance  charges  were  not  high. 
For  example  on  a  traffic  of  1,179,659  ton  miles,  the  Wabash  spent 
in  1906,  $1,235  per  mile  for  way  and  $1,462  per  mile  for  equipment, 
or  a  total  of  $2,697  per  mile,  the  average  mileage  earnings  being 
nearly  the  same ;  yet  these  maintenance  charges  were  a  very  con- 
siderable reduction  from  the  year  preceding.  It  is  obvious  that 
while  the  Western  Maryland's  maintenance  charges  might  have 
been  adequate  they  concealed  no  surplus  earnings. 

Surplus. 

The  consolidated  income  account  for  the  four  full  years  since 
the  Gould  interests  have  been  in  control  has  shown  a  surplus  as 
follows : 

1903 $1,215,382 

1904 400,442 

1905 206,097 

1906 251,508 

The  main  reason  for  this  diminishing  surplus  has  been  the 
diminished  earnings  from  coal  operations.  In  this  regard,  the 
Western  Maryland  has  met  with  the  same  experience  as  the  Dela- 
ware &  Hudson  and  some  other  coal  lines,  in  that  its  coal  operations 
have  shown  a  very  heavy  decrease.  The  net  profits  reported  for 
the  corresponding  four  years  as  follows : 


WESTERN  MARYLAND  741 

1903 $1,127,746 

1904 511,723 

1905 428,311 

1906 720,043 

In  1907  there  was  a  very  material  gain  in  total  net  income, 
but  this  was  offset  by  an  increase  of  nearly  $600,000  in  interest 
charges.  In  very  large  part  these  increased  charges  were  for 
betterments  from  which  the  road  did  not  derive  the  full  benefit  in 
1906. 

The  Balance  Sheet. 

As  of  June  30th.    1906,  there   were  current  assets,  excluding 

materials  and  supplies  on  hand  of $1,781,202 

Current   Liabilities    of 2,105,954 

Leaving  a  debit  balance  of •.  . .  .      $324,752 

The  item  of  cash  was  $317,429  and  the  balance  to  credit  of 
profit  and  loss  was  $2,039,463. 

Investment  Value. 

The  acquisition  of  the  Western  Maryland  by  the  Gould  interest 
was  intimately  associated  with  the  entry  of  the  Wabash  into  Pitts- 
burgh. It  is  obvious  that  when  the  connecting  link  with  the 
Pittsburgh  Terminal  or  the  Wheeling  &  Lake  Erie  is  completed,  the 
road  should  derive  a  heavily  increased  traffic.  The  value  of  the 
Western  Maryland  securities,  therefore,  is  largely  a  speculation  as 
to  what  the  profits  from  this  connection  will  be. 

The  amount  of  stock  outstanding  is  small  compared  with  the 
bonded  debt,  but  the  surplus  earnings  of  1906  were  equivalent  to 
less  than  2%  on  the  amount  outstanding. 

The  stock  was  quoted  as  high  as  $44  per  share  in  June  of  1906, 
declining  in  the  general  slump  to  $15  in  April  of  1907.  It  is 
scarcely  probable  that  the  connection  with  the  Wabash-Pittsburgh 
Terminal  will  be  competed  before  perhaps  1909,  and  in  the  mean- 
time the  road  will  be  put  to  large  capital  expenditures,  charges  on 
which  will  scarcely  increase  the  present  proportion  of  surplus  to 
earnings.  The  stock  would  therefore  be  an  exceedingly  long- 
pull  investment;  and  it  is  to  be  remembered  that  even  when  the 
transcontinental  line  be  completed,  the  actual  earnings  of  the  road 
will  still  be  largely  dependent  upon  the  conditions  of  the  coal  and 
iron  industry. 


WESTERN  PACIFIC  RAILWAY. 

The  Western  Pacific  has  under  construction  a  line  from  Salt 
Lake  City  to  Oakland,  across  the  Bay  from  San  Francisco,  a 
distance  of  930  miles.  It  has  purchased  the  Alameda  and  San 
Joaquin  R.  R.,  from  Stockton  to  Tesla,  California,  30  miles,  and 
the  control  of  the  Boca  and  Loyalton,  from  Boca  to  Beckwith,  56 
miles. 

The  line,  when  completed,  will  form  the  western  end  of  a 
Gould  transcontinental  line. 

The  president  of  the  company  is  E.  T.  Jeffery,  president  of 
the  Denver  and  Rio  Grande  R.  R.,  and  the  line  is  being  financed 
through  the  latter  road.  A  statement  of  the  conditions  which 
led  to  the  construction  of  the  road  was  given  in  the  report  of  the 
Denver  and  Rio  Grande  for  1905,  and  is  here  reproduced  in  ex- 
tenso. 

"For  many  years,  while  the  line  of  railway  between  Ogden 
and  San  Francisco  was  uncontrolled  by  interests  competitive 
with  your  System,  your  Company  enjoyed  a  satisfactory  share 
of  the  traffic  to  and  from  California,  and  one  of  the  reasons 
moving  the  management,  between  four  and  five  years  ago,  to 
acquire  the  Rio  Grande  Western,  was  the  closer  relationship  that 
would  be  established  with  the  San  Francisco  line  of  the  Southern 
Pacific  Company  and  the  freer  interchange  that  it  seemed  prob- 
able would  result  therefrom.  Subsequent  events  were  in  a 
measure  disappointing.  The  control  of  Southern  Pacific  by 
Union  Pacific  interests  has  led  to  unexpected  restrictions  on 
interchange,  and,  more  especially,  unlooked  for  impediments  in 
the  way  of  securing  traffic  in  territory  reached  by  the  Southern 
Pacific  Line. 

"These  considerations,  in  connection  with  the  rapid  develop- 
ment of  the  commercial,  agricultural  and  industrial  interests  on 
the  Pacific  coast,  and  the  increase  of  commerce  with  the  Philip- 
pines, China  and  Japan,  led  the  management,  reluctantly,  to 
investigate  the  feasibility  of  an  independent  line,  in  your  interest, 
from   cither   Salt  Lake   City  or  Ogden,  to   San   Francisco,   with 

(742) 


WESTERN  PACIFIC  743 

such  branches  and  laterals  as  might  from  time  to  time  be  desir- 
able for  the  development  of  natural  resources  within  reasonable 
distance  of  the  main  stem. 

"With  this  end  in  view,  and  with  a  manifest  obligation  be- 
fore it  to  advance  your  interests,  the  management  assisted  in 
promoting  the  plans  of  the  Western  Pacific  Railway  Company, 
a  corporation  organized  under  the  laws  of  the  State  of  California 
for  the  purpose  of  building  a  main  line  of  railway  from  San 
Francisco  to  Salt  Lake  City,  with  certain  proposed  branches,  or 
laterals.  Coincident  with  this,  careful  investigations  and  pre- 
liminary surveys  were  made,  under  the  auspices  of  your  Com- 
pany, some  of  them  by  its  Chief  Engineer,  Mr.  E.  J.  Yard,  and 
his  assistants,  for  the  purpose  of  determining  the  best  available 
route.  These  were  supplemented  by  the  professional  services  of 
Mr.  Virgil  G.  Bogue,  an  engineer  of  experience,  acting  under 
the  general  direction  of  your  Company.  These  engineering 
efforts  were  successful  beyond  expectation,  and  a  main  line  has 
been  definitely  located,  which,  through  the  Sierra  Nevada  range 
of  mountains,  has  a  maximum  gradient  of  one  per  cent.  (52.8 
feet  to  the  mile)  in  each  direction,  and  lighter  grades  on  both 
sides  of  the  range,  with  satisfactory  alignment  throughout,  and 
which,  in  general  desirability  and  advantages,  affords  a  route 
superior  to  any  existing  line  to  the  California  Coast. 

"The  management  of  the  Western  Pacific  Railway  Company 
co-operated  and  placed  all  their  plans,  surveys  and  information 
at  the  disposal  of  your  officers,  and,  after  protracted  negotiations, 
the  control  of  their  corporation  was  transferred  to  your  Com- 
pany with  all  rights,  franchises  and  property  interests,  including 
about  thirty-eight  miles  of  railway  in  operation. 

"As  planned,  the  main  line  between  San  Francisco  and  Salt 
Lake  City  will  be  substantially  constructed,  according  to  modern 
specifications,  and  will  be  laid  with  steel  rails  of  a  weight  of  85 
lbs.  per  yard.  It  will  connect  at  Salt  Lake  City  with  your  Rio 
Grande  Western  Raihvay  and  will  use,  jointly,  the  yards,  station 
facilities,  repair  shops,  etc.,  at  that  point,  paying  a  reasonable 
rental  therefor. 

"The  Western  Pacific  Railway  Company  has  at  present  an 
authorized  capital  of  $50,000,000.00,  which  will  be  immediately 
increased  to  $75,000,000.  The  financial  arrangements  for 
the  construction  of  the  railway  were  completed  in  the  last  three 
months  of  the  past  fiscal  year  by  the  issue  and  sale  to  responsible 


744  WESTERN  PACIFIC 

bankers  of  $50,000,000  of  First  Mortgage  Five  Per  Cent. 
Thirty- Year  Gold  Bonds  of  that  Company.  It  is  estimated 
that  the  proceeds  of  this  issue  will  cover  the  cost  of  the  main 
line,  with  terminals  and  necessary  equipment.  By  request  of 
the  Bankers  and  with  the  approval  of  your  Directors,  the  Presi- 
dent of  your  Company  has  been  elected  President  of  the  West- 
ern Pacific  Company. 

"The  interest  accruing  upon  the  Western  Pacific  Railway 
Company's  First  Mortgage  Bonds  during  the  period  of  con- 
struction, to  September  1st,  1908,  has  been  provided  for  and 
will  be  included  as  a  part  of  the  cost  of  construction. 

"As  a  part  of  the  plan  for  financing  the  Western  Pacific 
Railway,  contracts,  pledged  by  assignment  to  Bowling  Green 
Trust  Company,  Trustee  of  the  Mortgage,  securing  the  bonds, 
and  for  the  benefit  of  the  holders  thereof,  were,  on  the  part  of 
The  Denver  &  Rio  Grande  Railroad  Company  and  The  Rio 
Grande  Western  Railway  Company,  under  appropriate  corporate 
action,  entered  into  with  the  Western  Pacific  Railway  Com- 
pany, the  principal  features  of  which  are : 

"First.  In  the  event  that  the  proceeds  of  the  First  Mort- 
gage Bonds  of  the  Western  Pacific  Railway  Company  shall 
prove  insufficient  to  complete  the  main  line  of  railway  from  San 
Francisco  to  Salt  Lake  City,  with  adequate  terminals  and  ter- 
minal facilities,  and  equipment  to  the  amount  of  $3,000,000, 
the  Rio  Grande  Western  Railway  Company  undertakes  to  pro- 
vide sufficient  funds  to  assure  the  completion,  and  if  called  upon 
to  make  any  advances,  it  is  to  take  Second  Mortgage  Bonds  of 
the  Western  Pacific  Railway  Company,  bearing  interest  at  five 
per  cent,  per  annum. 

"Second.  The  Denver  &  Rio  Grande  Railroad  Company  and 
The  Rio  Grande  Western  Railway  Company,  jointly,  undertake 
to  semi-annually  make  up  any  deficit  in  the  earnings  and  income 
of  the  Western  Pacific  Railway  Company  in  the  amount  required 
to  meet  its  operating  and  maintenance  expenses  and  taxes,  and, 
after  completion  of  the  main  line,  the  interest  upon  its  First 
Mortgage  Bonds,  and,  after  August  1,  1911,  certain  installments 
due  upon  its  Sinking  Fund.  For  all  advances  so  made  they  are 
to  receive  the  promissory  notes  of  the  Western  Pacific  Railway 
Company,  payable  out  of  its  first  available  income.  These 
advances  on  the  part  of  The  Denver  &  Rio  Grande  Railroad 
Company  and  The  Rio  Grande  Western  Railway  Company  will 


WESTERN  PACIFIC  745 

be  made  only  in  the  event  and  to  the  extent  that  the  application 
of  the  proper  available  income  of  the  Western  Pacific  Railway- 
Company  is  insufficient  to  meet  the  above-mentioned  obligations, 
which  contingency  is  regarded  as  remote. 

''Third.  Under  the  contracts  with  the  Western  Pacific 
Railway  Company,  The  Denver  &  Rio  Grande  Railroad  Com- 
pany has  now  received  100,000  shares  of  the  capital  stock  of 
the  Western  Pacific  Railway  Company,  and  upon  the  increase 
of  the  capital  stock,  as  above  mentioned,  will  receive  an  addi- 
tional 100,000  shares  thereof.  In  like  manner  The  Rio  Grande 
Western  Railway  Company  has  received  150,000  shares,  and 
will,  upon  such  increase  of  the  capital  stock,  receive  an  addi- 
tional 150,000  shares. 

"Upon  the  completion  of  the  increase  of  capital  stock,  The 
Denver  &  Rio  Grande  Railroad  Company  and  The  Rio  Grande 
Western  Railway  Company  will,  together,  hold  in  their  treas- 
uries, 500,000  shares,  of  a  par  value  of  $50,000,000.00,  out  of  a 
total  capitalization  of  the  Western  Pacific  Railway  Companv 
of  750,000  shares,  of  a  par  value  of  $75,000,000.00.  This  will 
place  your  Company  in  the  absolute  control  of  the  Western 
Pacific  Railway  Company,  without  any  immediate  money  out- 
lay, and  with  only  a  contingent  liability  for  the  future. 

"You  should  be  advised  that  the  entire  issue  of  First  Mort- 
gage Bonds  of  the  Western  Pacific  Railway  Company  may  be 
called  in,  under  the  terms  of  the  Mortgage,  at  any  time  prior  to 
maturity,  at  105%  of  face  value  with  accrued  interest. 

"In  further  support  of  the  financing  of  the  Western  Pacific 
Railway  Company,  and  for  the  purpose  of  assuring  it  a  fair 
share  of  transcontinental  traffic,  one  of  the  contracts  above  men- 
tioned, between  The  Denver  &  Rio  Grande  Railroad  Company 
and  The  Rio  Grande  Western  Railway  Company,  of  the  one 
part,  and  the  Western  Pacific  Railway  Company,  of  the  other 
part,  also  includes  a  traffic  agreement.  Provision  is  made  for  a 
joint  through  line  of  the  Denver  &  Rio  Grande,  Rio  Grande 
Western  and  Western  Pacific  Railways.  This  arrangement  is 
not  only  of  great  advantage  to  each  of  the  companies  participat- 
ing in  such  joint  through  line,  but  it  also  assures  the  Western 
Pacific  Railway  Company  a  lucrative  business  and  good  earn- 
ings so  soon  as  its  main  line  is  put  in  operation. 

"The  construction  of  the  Western  Pacific  Railway  Company's 


746  WESTERN  PACIFIC 

line  is  now  a  certainty,  and  its  completion  within  the  next  three 
years  is  confidently  anticipated. 

"The  Pacific  Coast  traffic  is  already  very  large  and  is  rapidly 
growing.  In  view  of  the  greatly  increased  volume  of  this  traffic 
that  will  be  carried  over  your  existing  lines  so  soon  as  the  new 
railway  is  completed,  and  in  view  also  of  the  advantages  to  be 
derived  from  the  development  of  local  industries  and  the  open- 
ing up  of  additional  markets,  the  importance  and  value  of  this 
new  artery  of  commerce  to  your  System  of  railway  and  to  your 
Utah  Fuel  Company  can  hardly  be  overestimated. 

"Your  Board  of  Directors  have  great  confidence  in  the  ad- 
vantages which  this  transaction  will  bring  to  your  property,  and 
this  confidence  is  the  result  of  the  most  careful  investigation 
and  consideration,  extending  over  several  years,  and  is  based 
upon  the  commercial  growth  of  the  country,  and  especially  upon 
the  marvelous  richness  and  development  of  the  great  Pacific 
Coast  territory  and  of  the  foreign  trade  tributary  thereto. 

(Signed.)  E.  T.  JEFFERY. 

New  York  City,  August  27th,  1905." 
In  the  report  for  1906  President  Jeffery  states : 
"Active  work  has  been  under  way  during  the  greater  portion 
of  the  fiscal  year,  but  the  scarcity  of  labor  throughout  the 
country  has  retarded  the  work,  and  the  amount  accomplished 
thus  far  is  less  than  was  anticipated.  Every  effort  to  secure 
adequate  forces  is  being  made  by  the  contractors  who  have 
undertaken  the  heaviest  and  most  difficult  parts  of  the  enter- 
prise. It  is  thought  that  later  on  full  forces  will  be  secured. 
The  financial  details,  unfinished  a  year  ago,  were  satisfactorily 
concluded  by  increasing  from  $50,000,000  to  $75,000,000  the 
capital  stock  of  the  Western  Pacific  Company,  and,  pursuant  to 
the  contracts  mentioned  in  the  last  report,  by  placing  an  addi- 
tional 100,000  shares,  or  $10,000,000,  in  the  Denver  &  Rio  Grande 
Company's  treasury,  and  150,000  shares,  or  $15,000,000,  in  the 
treasury  of  the  Rio  Grande  Western  Company,  thus  giving  these 
two  Companies  500,000  shares  of  a  par  value  of  $50,000,000,  or 
two-thirds  of  the  entire  capital  stock. 

"It  may  not  be  out  of  place  to  say  that  recent  events  in  San 
Francisco  have  in  nowise  disturbed  the  confidence  your  directors 
have  expressed  in  this  new  line  of  railway  and  in  the  advantages 
to  be  derived  from  the  development  of  its  local  resources,  and 
the  importance  and  value  of  this  new  artery  of  commerce  to  the 


WESTERN  PACIFIC  747 

Denver  and  Rio  Grande  System.  Faith  in  the  future  of  the 
Western  Pacific  Railway  is  just  as  strong  as  it  was  before  the 
San  Francisco  disaster.  The  city  will  be  rebuilt  on  finer,  more, 
attractive  and  better  engineering  plans.  The  great  harbor  will 
continue  to  hold  and  increase  its  ocean  commerce ;  the  navigable 
waters  of  the  Sacramento  Valley  will  always  attract  and  sustain 
inland  navigation.  San  Francisco  as  a  financial  center  will  main- 
tain her  supremacy  on  the  Pacific  Coast;  trade  and  commerce 
by  land  and  water  will  pay  tribute  in  greater  volume  than  ever 
before  to  her  merchants,  manufacturers  and  citizens  generally. 
The  soil  of  California  is  as  fertile  as  it  was  before  the  disaster, 
the  mines  are  as'  productive,  the  forests  are  as  rich  in  timber, 
and  the  other  various  natural  resources  are  just  as  extensive  and 
valuable." 


WHEELING  AND  LAKE  ERIE. 

The  Wheeling  &  Lake  Erie  is  a  subsidiary  of  the  Wabash  and 
forms  a  connecting  link  between  that  road  and  the  Wabash-Pitts- 
burg Terminal,  which  carries  the  Gould  lines  into  the  Pennsylvania's 
stronghold.  Eventually  it  will  also  be  linked  with  the  Western 
Maryland.  In  1906  it  operated  442  miles,  extending  from  Wheeling, 
W.  Va.,  to  Toledo  on  Lake  Erie,  with  branches  to  Cleveland  and 
Zanesville.  During  the  year  it  acquired  the  Lorain  &  West  Virginia. 
under  construction  from  Wellington  north  to  Lorain,  30  miles,  with 
branches  five  miles,  and  was  building  a  cut-off  known  as  the  Sugar 
Creek  &  Northern,  22  miles.  The  company  owns  a  majority  of  the 
stock  of  the  Pittsburgh,  Wheeling  &  Lake  Erie  Coal  Company. 

The  Wheeling  &  Lake  Erie  connects  with  the  Wabash-Pitts- 
burg Terminal  Railroad  near  Jewctt,  Ohio,  and  a  majority  of  the 
Wheeling  &  Lake  Erie  stock  is  owned  by  the  latter  company,  namely  : 
$11,870,000  par  value  of  the  common,  $847,500  of  the  first  preferred, 
and  $6,423,800  of  the  second  preferred,  or  $19,141,300  out  of  a 
total  of  $36,980,400  of  the  outstanding  capital  stock.  All  of  the 
stock  of  the  Wabash-Pittsburg  Terminal  Company  in  turn  is  owned 
by  the  Wabash  Railroad. 

Ex-Governor  Myron  T.  Herrick  of  Cleveland,  Ohio,  was  chair- 
man of  the  board  in  1906  and  F.  A.  Delano,  President,  the  balance 
of  the  directorate  being  made  up  in  the  Gould  interest. 

In  1905  the  road  reported  1,004  shareholders. 

Capitalization. 

As  of  June  30th,  1906,  the  capitalization  of  the  road  stood  as 
follows : 

Common  stock $20,000,000 

1st  preferred 4,986,900 

2nd    preferred 11,993,500 

Total   $36,980,400 


■• 


(7 -is) 


WHEELING  &  LAKE  ERIE  749 

Funded   debt 15,000,000 

Notes    8,000,000 

Equipment  notes 3,314,500 

Total   capital $63,294,900 

Rentals  capitalized  at  4% 2,897,500 

Approximate  gross   capitalization $66,192,400 

Securities,   etc 1,857,829 

Approximate  net  capitalization $64,334,571 

Approximate  net  capital,  per  mile $145,553 

Average   miles   operated 442 

Net  earnings  on  net  capital 2.4 % 

Stock  on  net  capitalization 57% 

Fixed  charges  on  total  net  income 90% 

Factor  of  Safety 10% 

It  will  be  seen  from  the  above  that  the  road  is  fantastically 
over-capitalized  and  this  applies  not  merely  to  the  stock  but  also 
to  the  bonds.  If  all  of  the  stock  were  wiped  out  the  net  earnings 
of  1906  would  have  shown  only  about  5%  on  the  net  bonded  capitali- 
zation. It  will  be  further  seen  that  in  1906  fixed  charges  consumed 
nearly  the  entire  amount  of  net  income,  while  in  1905  the  road 
showed  a  nominal  deficit.  This,  in  the  face  of  gross  earnings  of 
$12,000  per  mile,  and  an  operating  ratio  of  no  more  than  70%,  was 
not  a  good  showing  and  indicated  the  heavy  burden  of  the  bonded 
debt. 

In  1905  the  issue  of  $35,000,000  of  50-year  4%  general  mort- 
gage bonds  was  authorized  to  provide  for  the  retirement  of  the 
existing  underlying  mortgage  bonds  and  to  make  financial  provision 
for  the  improvement  and  equipment  of  the  company's  property  to 
meet  the  demands  of  a  large  prospective  increase  of  business.  In 
pursuance  of  the  terms  of  this  mortgage,  $12,000,000  par  value  of 
these  bonds  were  issued  and  delivered  to  the  New  York  Trust  Com- 
pany in  part  security  of  $8,000,000  of  the  company's  3-year  5% 
gold  notes.  These  notes  were  sold  at  95,  realizing  a  sum  of  $7,600,- 
000,  applied  in  the  retirement  of  the  unsecured  floating  debt,  the 
purchase  of  equipment  and  an  extensive  scheme  of  grade-reduction 
and  other  betterments. 


750 


WHEELING  &  LAKE  ERIE 


Character  and  Stability  of  Traffic. 

The  road  is  largely  a  coal  line  and  the  report  contains  a  table 
showing  that  the  total  capacity  of  the  coal  mines  tributary  to  the 
road  amounts  to  27,830  tons  per  day.  The  average  freight  rates 
are  low,  .48c.  in  1906,  .50c.  in  1905,  the  average  train  load  in  1906 
537  tons.  Earnings  have  risen  very  rapidly  since  the  reorganization 
of  the  road  in  1899,  as  the  following  table  reveals: 


Year 

Miles  Operated 

Gross  Earnings 

Per  Mile 

1899-0 

393 
442 
442 
442 
442 
442 
442 

$2,670,025 
2,954,105 
3,537,023 
4,234,771 
4,325,282 
4,595,607 
5,318,801 

$6,794 
6,683 
8,002 
9,581 
9.7S2 
10,393 
12,028 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

Maintenance. 

Within  this  same  period  the  traffic  density  has  more  than 
doubled  and  the  same  is  true  of  maintenance,  the  items  comparing 
as  follows : 


Year            Traffic  Density 

Maintenance  per  Mile 

Way 

Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

963,094 
1,317,327 
1,510,534 
1,456,603 
1,714,423 
2,191,627 

$  758 
1,183 
1,809 
1,555 
1,656 
1,793 

$  889 
1,207 
1,513 
1,623 
1,728 
1,972 

$1,647 
2,390 
3,332 
3,178 
3,384 
3,765 

Average                1,525,601              $  1,459 

8  1,488                  $2,947 

N.  Y.  C.  &  StL 
Tol.  St.  L.  &  W 
Panhandle. .  .  . 

2,599,902 
1,046,149 
2,193,454 

$2,156 

996 

2,567 

$2,059 

959 

3,680 

$4,215 
1,955 
6,247 

It  will  be  seen  that  traffic  density  compared,  its  maintenance 
charges  were  on  about  the  same  level  as  those  of  the  Clover  Leaf 
and  about  the  same  as  the  Nickel  Plate,  but  not  much  more  than 
two-thirds  of  the  Panhandle. 

Undoubtedly  maintenance,  especially  for  1906,  represented  a 
considerable  surcharge. 

Surplus  Earnings. 

The  nominal  surplus  shown  after  the  charges  indicated  above 
have  been  as  follows : 


WHEELING  &  LAKE  ERIE 


751 


The  Balance  Sheet. 

As  of  June  30th,  1906,  the  balance  sheet  showed : 

Current  Assets $3,701,967 

Current   Liabilities 3,589,630 

Leaving  a  working  balance  of $112,337 

The  item  of  cash  on  hand  was  $2,544,364  and  the  balance  to 
credit  of  profit  and  loss  was  $406,796.  In  addition  to  the  above 
assets  noted  there  were  advances  for  sundry  extensions  of  $1,- 
355,137. 

Investment  Value. 

As  noted  under  the  Wabash  analysis,  the  Wabash  Terminal 
contract  with  the  Carnegie  Steel  Company  did  not  become  operative 
until  the  close  of  the  fiscal  year  of  1906.  Undoubtedly  the  operations 
of  this  contract  and  the  further  completion  of  the  connecting  link 
between  the  Wabash  Terminal  and  the  Western  Maryland  line  will 
add  very  heavily  to  the  traffic  of  the  Wheeling  &  Lake  Erie ;  while 
the  construction  of  the  Oroville  cut-off  will  reduce  the  maximum 
gradient  of  that  part  of  the  line  from  53  feet  to  21  feet,  the  maximum 
curvature  from  9°  to  3°  and  provide  a  line  fitted  for  highly  economi- 
cal transport  of  freight.  The  approximate  cost  of  this  cut-off  is 
estimated  at  $1,000,000. 

It  is  evident  that  with  rapidly  increasing  earnings  the  status  of 
the  Wheeling  &  Lake  Erie  securities  might  be  very  materially 
altered.  It  is  evident  that  even  in  1906  maintenance  charges  might 
have  been  sufficiently  reduced  to  show  a  larger  margin  of  safety 
for  the  interest  payments ;  and  the  amount  of  the  first  preferred 
stock  is  small. 

Both  first  and  second  preferred  stocks  are  entitled  to  non- 
cumulative  dividends  of  4%  per  annum  and  4%  on  the  first  pre- 


752  WHEELING  &  LAKE  ERIE 

ferred  would  require  under  $200,000;  4%  on  the  second  preferred 
would  need  $480,000  more. 

It  is  evident  that  the  road  is  shut  up  to  bonds  or  notes  for 
further  capital  issues  and,  as  noted,  the  interest  bearing  debt  is 
heavy.  As  increased  traffic  will  require  large  capital  expenditures 
it  is  evident  that  the  question  of  dividends  on  either  of  the  preferred 
stocks  is  rather  remote. 

The  first  preferred  sold  as  high  as  $66  per  share  in  1902,  de- 
clining to  $40  per  share  in  1903  and  to  $22  per  share  in  March  of 
1907. 

The  second  preferred  sold  as  high  as  $42  per  share  in  1902, 
declining  to  $20  in  1903  and  to  $14  in  March  of  1907. 

The  utility  of  the  $20,000,000  common  stock  is  not  obvious. 
Yet  it  actually  sold  for  $20  per  share  in  1902  and  $21  in  1906, 
declining  to  $9^  in  March  of  1907. 


WISCONSIN  CENTRAL  RAILWAY. 

The  Wisconsin  Central  operates  a  line  of  road  from  Chicago  to 
Ashland  on  Lake  Superior,  with  a  branch  to  St.  Paul  and  Minne- 
apolis on  the  west,  and  to  Manitowoc  on  Lake  Michigan.  It  obtains 
entrance  into  Chicago  over  the  tracks  of  the  Illinois  Central,  and  into 
Milwaukee  over  the  Chicago,  Milwaukee  and  St.  Paul,  and  in  St. 
Paul  and  Minneapolis  over  the  Great  Northern,  these  traffic  arrange- 
ments, with  the  exception  of  the  Milwaukee  contract,  being  for 
ninety-nine  years. 

The  road  struggled  along  for  years  under  a  series  of  receiver- 
ships and  bad  managements,  but  in  1899  it  came  into  new  hands  who 
undertook  the  upbuilding  of  the  road,  and  since  that  time  its 
growth  has  been  steady.  It  is  at  present  engaged  in  building  an 
important  extension  to  Duluth  and  Superior,  which  will  give  it  a 
short  and  very  direct  line  from  Chicago  to  Duluth,  and  is  ex- 
pected very  materially  to  enhance  the  fortunes  of  the  road. 

History. 

The  present  company  was  chartered  in  1897,  and  in  1899 
acquired  the  properties  of  the  Wisconsin  Central  and  its  subsidiary 
companies.  The  old  company  was  in  the  hands  of  receivers  from 
1879  to  1887,  when  a  new  company  was  organized  which  lasted 
for  six  years,  until  1893,  when  new  receivers  were  appointed 
who  carried  on  the  road  until  it  came  into  the  hands  of  the  present 
company  in  1899.  The  road  was  utilized  by  the  Northern  Pacific 
as  an  outlet  from  St.  Paul  to  Chicago  in  the  old  Villard  days,  and 
in  1890  a  close  traffic  contract  was  altered  to  a  ninety-nine  year 
lease  to  the  Northern  Pacific.  This  lease  was  cancelled  in  the 
crash  of  1893,  and  since  that  time  the  road  has  been  operated  as 
an  independent  line. 

It  is  rather  curious  to  reflect  that  the  old  Wisconsin  Central 
was  one  of  the  roads  in  which  John  D.  Rockefeller  was  supposed  to 
have  a  principal  interest,  the  other  being  the  Missouri,  Kansas  and 
Texas,  and  both  until  recent  years  as  badly  managed  roads  as  were 
to  be  found  in  the  country. 

48  (753) 


754  WISCONSIN  CENTRAL 

In  1906  the  company  operated  977  miles  of  track,  which  will 
be  slightly  added  to  by  the  extension  from  Owen  to  Duluth.  About 
half  of  this  extension  has  been  completed,  and  it  was  expected  that 
the  extension  would  be  in  operation  in  1907.  The  road  penetrates 
the  great  forests  of  Northern  Wisconsin  and  reaches  also  into  the 
iron  regions,  and  its  traffic  is  mainly  made  up  of  low  grade  mine 
and  forest  products. 

In  1906  the  syndicate  headed  by  W.  A.  Bradford,  president  of 
the  Chicago,  Cincinnati  and  Louisville,  and  George  M.  Cumming, 
president  of  the  United  States  Mortgage  and  Trust  Company  of 
New  York,  obtained  control  of  the  road,  purchasing  the  stock  of 
Maitland,  Coppell  and  Company,  Brown  Brothers  and  Company, 
James  C.  Colgate  and  Company,  and  Edward  Sweet  and  Company. 
This  change  brought  about  the  retirement  of  president  H.  F. 
Whitcomb,  William  L.  Bull,  chairman  of  the  board,  James  C.  Col- 
gate, Gerald  L.  White  and  John  Crosby  Brown,  who  had  hitherto 
been  dominant  in  the  affairs  of  the  new  company.  The  new 
directors  included  George  M.  Cumming,  New  York,  chairman  of 
the  board ;  William  A.  Bradford,  Jr.,  of  Cincinnati,  president ;  T. 
L.  Chadbourne,  chairman  of  the  executive  committee ;  C.  G.  Rasmus, 
of  the  United  States  Mortgage  and  Trust  Company ;  F.  E.  Dewey, 
Harry  C.  Starr,  John  F.  Hill,  Mark  T.  Cox  and  George  A.  Fernald 
of  Boston,  representing  the  syndicate  in  control ;  Fred  T.  Gates, 
representing  Rockefeller  interests  and  William  F.  Vilas,  Madison, 
Wisconsin,  formerly  Secretary  of  the  Interior. 

It  was  stated  at  the  time  of  the  change  that  the  purchase  was 
not  in  the  interests  of  the  Canadian  Pacific  or  of  any  of  the  larger 
lines,  as  had  been  rumored,  and  that  the  property  would  continue 
to  be  operated  as  an  independent  line.  Mr.  Bradford  also  stated 
that  the  fact  of  his  being  also  president  of  the  Chicago,  Cincinnati 
and  Louisville,  was  of  no  significance. 

Capitalization. 

One  of  the  great  difficulties  under  which  the  Wisconsin  Cen- 
tral has  always  suffered  is  that  under  the  successive  reorganizations, 
the  capital  account  was  never  scaled  down,  and  in  spite  of  a  con- 
siderable increase  in  earnings,  it  is  still  very  much  over-capitalized. 
Deducting  the  amounts  of  common  and  preferred  held  in  the  treas- 
ury, the  capitalization  on  June  30th,  1906,  stood  as  follows: 


WISCONSIN  CENTRAL  755 

Common   stock    (net) $16,147,876 

Preferred  stock  (net) 11,267,104 

Total    stock $27,414,980 

Funded    debt 30,946,485 

Total    capital $58,361,465 

Rentals  capit.  at  4% 9,222,237 

Approximate  gross  capitalization $67,583,705 

Approx.  capital  per  mile $69,174 

Average  miles   operated 977 

Net  earnings  on  net  capitalization 3.8% 

Stock  on  net  capitalization 40% 

Fixed  charges  on  total  net  income 69% 

Factor  of   Safety 31% 

The  amounts  of  securities  owned  were  too  small  to  require  con- 
sideration in  the  above  tabulation. 

It  will  be  seen  that  the  capitalization  per  mile  for  a  road  with 
gross  earnings  of  only  $7,285  per  mile  is  very  high.  The  estimated 
net  capitalization  of  $69,174  per  mile  compares  with  $32,057  per 
mile  for  the  Chicago  and  Northwestern  and  $33,900  per  mile  for 
the  Chicago,  Milwaukee  and  St.  Paul,  both  with  rather  higher 
mileage  earnings. 

When  net  earnings  are  compared  with  the  estimated  net  capi- 
talization, the  percentage  shown  amounts  to  only  3.8%  as  against 
10.5%  for  the  Northwestern,  and  9.7%  for  the  St.  Paul. 

The  stock  represents  40"%  of  the  estimated  net  capitalization, 
but  the  Fixed  Charges  consumed  in  1906  nearly  70%  of  the  total 
net  income,  leaving  a  Factor  of  Safety  for  the  securities  of  only 
about  30%.  These  latter  items  further  reflect  the  financial  weak- 
ness of  the  road.  A  Factor  of  Safety  of  only  30%  for  the  interest, 
rental  and  other  charges  on  a  small  road  in  the  midst  of  powerful 
competitors  is  insufficient,  and  it  is  this  which  has  so  weakened  the 
credit  of  the  road  that  it  has  been  unable  to  secure  new  capital  on 
favorable  terms  until  very  recently. 

The  Wisconsin  Central  has  practically  no  outside  holdings, 
and  has  therefore  no  equities  worth  mentioning. 


756 


WISCONSIN  CENTRAL 


Increase  of  Capitalization. 

Since  the  reorganization  of  the  road  the  capitalization  has  in- 
creased very  slightly,  the  rentals  paid  have  changed  very  little,  and 
from  the  first  full  year  of  the  operations  of  the  new  company  the 
changes  in  nominal  capitalization  and  earnings  have  been  as  follows : 


Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900. 
1906. 


$15,807,876   $11,151,605  $26,276,500  $54,143,981     $5,637,416 
16,147,876  !  11,267,104  i  30,946,485  |  58,361,465  |     7,118,576 


Increase  of  six  years:   Total  capital,  7%;  gross  earnings,  31%. 

Increase  of  6  years :  Total  capital,  7%  ;  gross  earnings,  26%. 

It  will  be  seen  that  with  a  very  slight  increase  in  the  nominal 
capitalization,  the  gross  earnings  have  increased  more  than  25%. 
This  is  a  very  favorable  showing. 

Stability  of  Earnings. 

The  reports  of  the  road  do  not  itemize  its  traffic  but  as  already 
stated  it  consists  principally  in  the  carriage  of  ores  and  lumber,  and 
the  average  rate  per  ton-mile,  .66c,  is  low  for  a  road  of  that  section. 
In  spite  of  this  the  earnings  have  increased  steadily  and  with  very 
little  increase  of  mileage  are  about  50%  higher  than  in  1896-7.  The 
items  through  a  series  of  years  appear  as  follows : 


Year 

Miles  Operated 

Gross  Earnings           Per  Mile 

1896-7 

1897-8 

934 
934 
939 
945 
955 
977 
977 
977 
977 
977 

$4,179,971 
4,939,725 
5,118,019 
5,637,416 
5,324,274 
6,041,470 
6,651,862 

$4,475 
5,287 

1898-9 

1899-0 

1900-1 

1901-2 

1902-3 

5,450 
5,963 
5,574 
6,178 
6,808 

1903-4 

1904-5 

1905-6 

6,466,176 
6,650,883 
7,118,576 

6,618 
6,807 
7,285 

It  will  be  seen  that  the  earnings  per  mile  have  risen  from  $4,475 
in  1897  to  $7,285  in  1906.  This  is  an  excellent  showing  in  the  face 
of  the  heavy  handicap  under  which  the  road  has  been  operated  and 
the  low  rate  which  it  is  able  to  obtain  on  its  freight. 

Maintenance. 

Not  a  rich  road  and  with  a  low  average  of  earnings,  the  general 
standard  of  the  Wisconsin  Central  both  as  to  roadbed  and  equip- 


WISCONSIN  CENTRAL 


757 


ment  is  low.  It  had  in  1906  only  184  engines  and  8,751  cars,  of 
which  only  52,  for  example,  were  first  class  passenger  cars.  The 
standard  of  equipment  is  low  and  naturally  the  property  does  not 
require  any  such  sums  for  maintenance  as,  for  example,  the  North- 
western or  the  St.  Paul,  with  which  it  directly  competes.  The  com- 
parisons of  traffic  density  and  maintenance  for  a  series  of  years 
are  as  follows : 


Year 

Traffic  Density 

Maintenance  per  Mile 

1 

Total 

Way         !   Equipment 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 

547,505 
650,708 
753,692 

758,746 
758,037 
822,935 

$659 
799 

780 
755 

886 
879 

$500 
623 
736 
725 
795 
824 

$1,159 
1,422 
1,516 
1,480 
1,681 
1,703 

715,270 

$793 

$700 

$1,493 

Northwestern..            640,983 
St.  Paul 601,003 

991 
929 

858 
632 

1,849 
1,561 

The  average  of  maintenance  is  not  very  heavy.  It  will  be  seen 
that  its  traffic  density  is  slightly  higher  than  the  average  of  either 
the  North  Western  or  the  St.  Paul,  but  it  has  nothing  like  the  pas- 
senger earnings  of  these  two  roads,  and  the  fact  that  its  total  for 
maintenance  per  mile  is  nearly  up  to  that  of  the  St.  Paul  indicates 
that  maintenance  has  been  perhaps  adequate,  though  the  standard 
of  neither  the  St.  Paul  nor  the  North  Western  is  high.  It  is  prob- 
able that  the  road  has  spent  all  that  it  was  able  to  spend,  and  in 
addition  to  this  it  has  systematically  turned  back  practically  all  of 
its  surplus  into  improvements.  The  appropriations  since  the  road 
came  under  its  present  management  have  been  as  follows : 


1899-00 $450,747 

1900-1 11,350 

1901-2 124,990 

1902-3 563,098 

1903-4 643,574 

1904-5 423,997 

1905-6 373,420 

Total $2,591,176 


758  WISCONSIN  CENTRAL 

Surplus  Earnings. 

The  amount  of  surplus  for  six  years,  before  the  improvement 
charges  noted  above,  and  small  sinking  fund  charges  amounting  to 
about  $65,000  a  year,  have  been  as  follows : 


Year 

Surplus 

Per  cent. 
Earned  on 
Preferred 

Average 

Price 
Preferred 

1900-1 

$246,117 
480,104 

724,072 
424,247 
555,844 
802,188 

2.2 

4.3 

6.5 

3.8 

5. 

7.2 

44 

1901-2 

48 

1902-3 

44 

1903-4 

43 
54 
54 

1904-5 

1905-6 

It  will  be  seen  from  this  that  the  road  has  been  able  to  earn  a 
small  percentage  on  its  preferred  stock,  though  no  dividends  have 
ever  been  paid. 

The  Balance  Sheet. 

At  the  close  of  the  fiscal  year  of  1906  the  balance  sheet,  ex- 
cluding materials  on  hand  showed : 

Current    assets $1,346,224 

Current   liabilities 1,493,576 

Leaving  a  nominal  debit  balance  of $147,352 

In  addition  there  were  assets  in  the  land  department  of  $594,- 
350,  and  cash  for  reserve  funds  and  appropriations,  $392,796. 

The  balance  sheet  shows  also  construction  loans  to  the  amount 
of  $1,199,000  against  which  there  was  cash  in  hand  and  securities 
deposited  to  the  same  amount.  The  assets  also  show  construction 
funds  on  deposit  of  $1,244,621,  so  that  adding  these  items  together 
it  appears  that  the  company  was  fairly  well  off  for  working  capital 
and  provided  with  cash  on  its  extension  to  Duluth. 

Investment  Value. 

The  preferred  stock  is  entitled  to  non-cumulative  dividends  of 
4%  per  annum  and  after  4%  dividends  have  been  paid  on  the  com- 
mon, in  any  year,  both  classes  participate  in  any  further  dividend. 
As  noted  above  no  dividends  have  been  paid. 

The  holders  of  the  preferred  stock  have  the  right  to  elect  a 
majority  of  the  board  of  directors,  whenever  for  two  successive 
years  the  full  4%  has  not  been  earned  and  paid  in  cash.     Although 


WISCONSIN  CENTRAL  759 

the  surplus  shown  through  the  six  years  has  averaged  4.8%  on 
the  preferred,  or  sufficient  to  pay  the  full  dividend,  the  shareholders 
have  permitted  these  excess  earnings  to  be  turned  back  into  the 
road  for  improvements,  and  the  right  of  election  of  a  majority  of 
the  board  has  not  been  exercised. 

Wisconsin  Central  preferred  sold  as  high  as  $57  per  share  in 
1902,  declining  to  $33  in  1903,  and  rising  to  $64  in  1906.  It  is  to 
be  supposed  that  the  syndicate  now  dominating  in  the  road  has  a 
working  control,  so  that  the  value  of  the  balance  of  the  preferred 
held  outside  is  very  largely  dependent  upon  the  disposition  of  the 
controlling  interests.  The  Great  Northern  and  the  Northern  Pa- 
cific now  have  an  outlet  to  Chicago  through  their  ownership  of  the 
Burlington  and  the  competition  of  the  Central  with  the  North- 
western or  the  St.  Paul  is  not  of  such  a  character  as  to  make  it  any 
great  interest  to  these  roads  to  control  the  property.  The  line  to 
which  the  acquisition  of  the  Wisconsin  Central  would  probably  be 
most  useful  is  the  Canadian  Pacific  or  rather  its  subsidiary  Minn., 
St.  Paul  &  Sault  Ste.  Marie;  but  it  is  not  very  clear  that  an 
outlet  for  these  lines  to  Chicago  would  be  any  decisive  strategic  ad- 
vntage  and  it  is  not  likely  that  control  of  the  road  could  now  be 
obtained  at  a  price  that  would  make  it  a  very  attractive  purchase. 

A  six  per  cent,  capitalization  of  its  net  earnings  in  1906  would 
give  the  road  a  valuation  of  about  $43,000,000,  and  deducting  from 
this  the  funded  debt  of  about  $31,000,000  would  leave  $80  per  share 
for  the  4%  preferred  and  about  $20  per  share  for  the  common 
stock  outstanding.  Were  4%  dividends  paid  on  the  preferred  as 
they  could  have  been  paid  in  1905  and  1906,  as  well  as  on  the  earn- 
ings of  1903,  the  preferred  might  sell  at  around  the  figure  noted 
above,  and  should  the  road  show  under  the  new  management  the 
same  steady  progress  it  has  shown  in  the  six  previous  years,  the 
preferred  shareholders  might  reasonably  expect  a  dividend.  The 
average  price  of  the  preferred  in  1906  was  a  little  over  $50  per 
share,  and  in  March  of  1907  it  sold  at  $36.  Purchased  at  any  such 
considerable  recession  in  prices  the  stock,  if  put  away  and  held 
ought  to  show  a  steady  enhancement  in  value  and  eventually  a  satis- 
factory yield  in  dividends. 

The  common  stock  is  one  of  a  numerous  class  of  "low-priced" 
shares  which  are  bandied  about  in  the  stock  market  and  having  no 
particular  value  other  than  prospects,  rise  and  fall  with  the  general 
rise  and  fall  of  prices.  It  sold  as  high  as  $33  per  share  in  1906,  as 
low  as  $14  per  share  in  1903,  and  $16  in  March,  1907.     Purchased 


760  WISCONSIN  CENTRAL 

at  something  like  these  figures,  as  a  pure  speculation,  and  held,  it 
is  apt  to  show  a  fair  return  to  the  purchaser  who  buys  it  simply  for 
the  purpose  of  selling  it  again  when  the  general  market  rises.  As 
an  investment  there  is  nothing  in  the  progress  of  the  road  to  indi- 
cate that  it  has  any  large  prospects  or  any  solid  value. 


YAZOO  AND  MISSISSIPPI  VALLEY  RAILROAD. 

The  Yazoo  and  Mississippi  Valley  is  a  subsidiary  line  of  the 
Illinois  Central,  operating  a  network  of  railroads  through  the  low 
lands  of  the  Mississippi  Valley,  from  Memphis  to  New  Orleans, 
paralleling  the  main  line  of  the  Central.  In  1906  it  operated  an  aver- 
age of  1,211  miles  with  gross  earnings  of  $8,171,250. 

Operating  expenses,  including  taxes,  were  very  heavy, 
amounting  to  84%  of  the  gross  income,  and  leaving  a  very  slight 
sum — $29,617— for  surplus  over  Fixed  Charges.  This  surplus 
was  before  any  payment  on  the  second  mortgage  on  which  no 
payment  was  made  in  either  1905  or  1906.  The  same  is  true  of 
the  $10,000,000  of  land  grant  income  bonds  on  which  no  interest 
has  ever  been  paid. 

Practically  all  of  the  stock  and  bonds  of  the  road  are  owned 
by  the  Illinois  Central. 

It  is  evident  that  the  operating  charges  were  adjusted  to 
absorb  practically  the  entire  available  surplus  over  Fixed 
Charges.  The  maintenance  charges  were  especially  heavy  in 
1906,  the  appropriations  for  way  amounting  to  $1,810  per  mile,  as 
against  $1,553  for  the  year  preceding. 

The  appropriations  for  maintenance  of  equipment  amounted 
to  $856  per  mile  in  1906,  as  against  $781  in  1905.  These  charges 
on  a  road  with  gross  earnings  of  $7,159  per  mile  and  a  traffic 
density  of  640,167  ton-miles  per  mile  of  road  were  assuredly  high. 

The  total  of  $2,664  per  mile  compares  with  $3,289  for  the 
parent  road,  with  nearly  double  the  traffic  density.  It  is  not 
improbable  that  the  road  could  be  very  amply  maintained  even 
on  the  Illinois  Central  standard  at  somewhere  around  $2,000  per 
mile.  Probably  operating  expenses  in  1900  concealed  upwards 
of  $700  per  mile  of  legitimate  earnings.  This  on  the  1,211  miles 
of  operated  road  would  have  shown  a  surplus  of  over  $850,000 
for  the  year  above  Fixed  Charges,  and  this  would  have  been 
sufficient  to  pay  the  regular  5%  due  on  the  second  mortgage 
bonds  and  the  sum  of  $350,000  additional  on  the  interest  in  ar- 

(761) 


762  YAZOO  &  MISSISSIPPI  VALLEY 

rears.  This  would  have  meant  a  matter  of  $850,000  added  to  the 
Other  Income  of  the  parent  road. 

The  average  rate  per  ton  per  mile  received  by  the  road  is 
high,  amounting  to  .82c  in  1906,  and  .89c  in  1905. 

The  Funded  Debt  on  which  charges  are  fixed  amounts  to 
only  about  $27,000  per  mile,  which  on  a  road  with  average  earn- 
ings of  $7,000  per  mile  is  not  unduly  excessive.  The  year  of  1906 
was  not  an  exceptional  year,  the  average  earnings  per  mile  show- 
ing a  slight  decrease  from  1905.  There  is  no  appafent  reason 
why  operating  charges  should  be  15%  above  the  general  average 
of  68%  to  70%  for  American  roads,  save  in  the  determination 
of  the  management  to  put  earnings  into  improvements. 

The  road  may  therefore  be  regarded  as  an  equity  of  steadily 
increasing  value  in  the  assets  of  the  parent  company. 


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